LOCKHEED MARTIN CORPORATION
2015-Annual-Report
2015-Annual-Report
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<strong>LOCKHEED</strong> <strong>MARTIN</strong> <strong>CORPORATION</strong><br />
2015 ANNUAL REPORT
FINANCIAL HIGHLIGHTS<br />
In millions, except per share data 2015 2014 2013<br />
Net Sales $46,132 $45,600 $45,358<br />
Segment Operating Profit 5,486 5,588 5,752<br />
Consolidated Operating Profit 5,436 5,592 4,505<br />
Net Earnings From Continuing Operations 3,605 3,614 2,950<br />
Net Earnings 3,605 3,614 2,981<br />
Diluted Earnings Per Common Share<br />
Continuing Operations 11.46 11.21 9.04<br />
Net Earnings 11.46 11.21 9.13<br />
Cash Dividends Per Common Share 6.15 5.49 4.78<br />
Average Diluted Common Shares Outstanding 315 322 327<br />
Cash and Cash Equivalents $ 1,090 $ 1,446 $ 2,617<br />
Total Assets 49,128 37,046 36,163<br />
Total Debt, net 15,261 6,142 6,127<br />
Stockholders’ Equity 3,097 3,400 4,918<br />
Common Shares Outstanding at Year-End 305 316 321<br />
Net Cash Provided by Operating Activities $ 5,101 $ 3,866 $ 4,546<br />
NOTE: For additional information regarding the amounts presented above see the Form 10-K portion of this Annual Report.<br />
A reconciliation of Segment Operating Profit to Consolidated Operating Profit is included on the page preceding the back<br />
cover of this Annual Report.<br />
On the Cover: The Sikorsky Black Hawk helicopter<br />
Known for its superior performance and versatility, the legendary Sikorsky Black Hawk helicopter has been the military<br />
helicopter of choice for 27 nations since it entered service with the U.S. Army in 1979.
DEAR FELLOW STOCKHOLDERS:<br />
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Our Leadership Team (from left to right): Sondra L. Barbour, Executive Vice President, Information Systems & Global Solutions; Richard F. Ambrose, Executive Vice<br />
President, Space Systems; Bruce L. Tanner, Executive Vice President and Chief Financial Officer; Marillyn A. Hewson, Chairman, President and Chief Executive Officer;<br />
Richard H. Edwards, Executive Vice President, Missiles and Fire Control; Orlando P. Carvalho, Executive Vice President, Aeronautics; and Dale P. Bennett, Executive<br />
Vice President, Mission Systems and Training.<br />
I<br />
2015 Annual Report
OUTSTANDING FINANCIAL PERFORMANCE<br />
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total stockholder return in 2015—significantly<br />
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and returned a significant portion of it to our<br />
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120 percent of free cash flow to stockholders<br />
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DELIVERING FOR OUR CUSTOMERS<br />
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done this with a continued focus on the superior<br />
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Producing the world’s most advanced aircraft:<br />
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Promoting a strong missile defense:<br />
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Lockheed Martin Corporation<br />
II
Lockheed Martin Chairman, President and CEO Marillyn Hewson in the Orion Multipurpose Crew Vehicle cockpit simulator at the<br />
Lockheed Martin Global Vision Center in Arlington, Virginia.<br />
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Detecting threats on land and at sea:<br />
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Expanding the boundaries of Space Exploration:<br />
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III<br />
2015 Annual Report
construction is well underway following successful<br />
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POSITIONING FOR THE FUTURE<br />
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Innovation with Purpose:<br />
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why we increased our independent research and<br />
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Directed Energy:<br />
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Autonomy / Robotics: Lockheed Martin has<br />
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pounds of water in one hour during firefighting<br />
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Hybrid Airships:<br />
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International Growth: As part of our growth<br />
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Lockheed Martin Corporation<br />
IV
More than 4,800 Lockheed Martin employees volunteered at more than 140 events around the world during the Month of Giving<br />
in October. Lockheed Martin also raised more than $9 million through workplace giving campaigns.<br />
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and supports our international growth strategy in<br />
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presence in these nations helps us to strengthen our<br />
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facilities and strong relationships in countries with<br />
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LOOKING TO THE FUTURE<br />
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This letter includes references to segment operating profit, segment margin and free cash flow, which are non-GAAP financial measures.<br />
For reconciliations between our non-GAAP measures and the nearest GAAP measures, please refer to the page preceding the back cover<br />
of this Annual Report. Additionally, this letter includes statements that, to the extent they are not recitations of historical fact, constitute<br />
forward-looking statements within the meaning of the federal securities laws, and are based on Lockheed Martin’s current expectations<br />
and assumptions. For a discussion identifying important factors that could cause actual results to vary materially from those anticipated<br />
in the forward-looking statements, see the Corporation’s filings with the SEC including, but not limited to, “Management’s Discussion and<br />
Analysis of Financial Condition and Results of Operations” and “Risk Factors” in the Form 10-K portion of this Annual Report.<br />
V<br />
2015 Annual Report
CORPORATE DIRECTORY<br />
(As of February 24, 2016)<br />
BOARD OF DIRECTORS<br />
Daniel F. Akerson<br />
Retired Vice Chairman<br />
The Carlyle Group<br />
Nolan D. Archibald<br />
Retired Chairman, President and<br />
Chief Executive Officer<br />
The Black & Decker Corporation<br />
Rosalind G. Brewer<br />
President and<br />
Chief Executive Officer<br />
Sam’s Club (a division of<br />
Wal-Mart Stores, Inc.)<br />
David B. Burritt<br />
Executive Vice President and<br />
Chief Financial Officer<br />
United States Steel Corporation<br />
Bruce A. Carlson<br />
Retired General<br />
United States Air Force<br />
James O. Ellis, Jr.<br />
Retired President and<br />
Chief Executive Officer<br />
Institute of Nuclear Power<br />
Operations<br />
Thomas J. Falk<br />
Chairman and<br />
Chief Executive Officer<br />
Kimberly-Clark Corporation<br />
Marillyn A. Hewson<br />
Chairman, President and<br />
Chief Executive Officer<br />
Lockheed Martin Corporation<br />
Gwendolyn S. King<br />
President<br />
Podium Prose<br />
(A Washington, D.C.<br />
Speaker’s Bureau)<br />
James M. Loy<br />
Senior Counselor<br />
The Cohen Group<br />
Joseph W. Ralston<br />
Vice Chairman<br />
The Cohen Group<br />
Anne Stevens<br />
Retired Chairman and<br />
Principal<br />
SA IT Services<br />
EXECUTIVE OFFICERS<br />
Richard F. Ambrose<br />
Executive Vice President<br />
Space Systems<br />
Sondra L. Barbour<br />
Executive Vice President<br />
Information Systems<br />
& Global Solutions<br />
Dale P. Bennett<br />
Executive Vice President<br />
Mission Systems and Training<br />
Orlando P. Carvalho<br />
Executive Vice President<br />
Aeronautics<br />
Brian P. Colan<br />
Vice President, Controller and<br />
Chief Accounting Officer<br />
Richard H. Edwards<br />
Executive Vice President<br />
Missiles and Fire Control<br />
Marillyn A. Hewson<br />
Chairman, President and<br />
Chief Executive Officer<br />
Maryanne R. Lavan<br />
Senior Vice President,<br />
General Counsel and<br />
Corporate Secretary<br />
Kenneth R. Possenriede<br />
Vice President and Treasurer<br />
Bruce L. Tanner<br />
Executive Vice President and<br />
Chief Financial Officer<br />
Lockheed Martin Corporation<br />
VI
UNITED STATES<br />
SECURITIES AND EXCHANGE COMMISSION<br />
Washington, D.C. 20549<br />
Form 10-K<br />
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF<br />
THE SECURITIES EXCHANGE ACT OF 1934<br />
For the fiscal year ended December 31, 2015<br />
Commission file number 1-11437<br />
<strong>LOCKHEED</strong> <strong>MARTIN</strong> <strong>CORPORATION</strong><br />
(Exact name of registrant as specified in its charter)<br />
Maryland 52-1893632<br />
(State or other jurisdiction of<br />
(I.R.S. Employer<br />
incorporation or organization)<br />
Identification No.)<br />
6801 Rockledge Drive, Bethesda, Maryland 20817-1877 (301/897-6000)<br />
(Address and telephone number of principal executive offices)<br />
Securities registered pursuant to Section 12(b) of the Act:<br />
Title of each class<br />
Common Stock, $1 par value<br />
Name of each exchange on which registered<br />
New York Stock Exchange<br />
Securities registered pursuant to Section 12(g) of the Act: None<br />
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.<br />
Yes È No ‘<br />
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.<br />
Yes ‘ No È<br />
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the<br />
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required<br />
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘<br />
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every<br />
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)<br />
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).<br />
Yes È No ‘<br />
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is<br />
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information<br />
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È<br />
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a<br />
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting<br />
company” in Rule 12b-2 of the Exchange Act.<br />
Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘<br />
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange<br />
Act). Yes ‘ No È<br />
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant computed by<br />
reference to the last sales price of such stock, as of the last business day of the registrant’s most recently completed second<br />
fiscal quarter, which was June 26, 2015, was approximately $58.2 billion.<br />
There were 305,487,347 shares of our common stock, $1 par value per share, outstanding as of January 29, 2016.<br />
DOCUMENTS INCORPORATED BY REFERENCE<br />
Portions of Lockheed Martin Corporation’s 2016 Definitive Proxy Statement are incorporated by reference into Part III of<br />
this Form 10-K.
Lockheed Martin Corporation<br />
Form 10-K<br />
For the Year Ended December 31, 2015<br />
Table of Contents<br />
PART I<br />
Page<br />
ITEM 1. Business ....................................................................... 3<br />
ITEM 1A. Risk Factors .................................................................... 11<br />
ITEM 1B. Unresolved Staff Comments ....................................................... 21<br />
ITEM 2. Properties ...................................................................... 21<br />
ITEM 3. Legal Proceedings ............................................................... 22<br />
ITEM 4. Mine Safety Disclosures ........................................................... 22<br />
ITEM 4(a). Executive Officers of the Registrant ................................................. 23<br />
PART II<br />
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of<br />
Equity Securities .............................................................. 25<br />
ITEM 6. Selected Financial Data ........................................................... 27<br />
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ...... 28<br />
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 64<br />
ITEM 8. Financial Statements and Supplementary Data ......................................... 66<br />
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 107<br />
ITEM 9A. Controls and Procedures ........................................................... 107<br />
ITEM 9B. Other Information ................................................................ 109<br />
PART III<br />
ITEM 10. Directors, Executive Officers and Corporate Governance ................................. 109<br />
ITEM 11. Executive Compensation .......................................................... 109<br />
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder<br />
Matters ...................................................................... 109<br />
ITEM 13. Certain Relationships and Related Transactions, and Director Independence .................. 109<br />
ITEM 14. Principal Accountant Fees and Services .............................................. 109<br />
PART IV<br />
ITEM 15. Exhibits and Financial Statement Schedules ........................................... 110<br />
SIGNATURES ................................................................................ 114
PART I<br />
ITEM 1.<br />
Business.<br />
General<br />
We are a global security and aerospace company principally engaged in the research, design, development, manufacture,<br />
integration and sustainment of advanced technology systems, products and services. We also provide a broad range of<br />
management, engineering, technical, scientific, logistics and information services. We serve both U.S. and international<br />
customers with products and services that have defense, civil and commercial applications, with our principal customers<br />
being agencies of the U.S. Government. In 2015, 78% of our $46.1 billion in net sales were from the U.S. Government, either<br />
as a prime contractor or as a subcontractor (including 58% from the Department of Defense (DoD)), 21% were from<br />
international customers (including foreign military sales (FMS) contracted through the U.S. Government) and 1% were from<br />
U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security and<br />
information technology, including cybersecurity.<br />
We operate in an environment characterized by both increasing complexity in global security and continuing economic<br />
pressures in the U.S. and globally. A significant component of our strategy in this environment is to focus on program<br />
execution, improving the quality and predictability of the delivery of our products and services, and placing security<br />
capability quickly into the hands of our U.S. and international customers at affordable prices. Recognizing that our customers<br />
are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined manner with a<br />
focus on adjacent markets close to our core capabilities, as well as growing our international sales. We continue to focus on<br />
affordability initiatives. We also expect to continue to invest in technologies to fulfill new mission requirements for our<br />
customers and invest in our people so that we have the technical skills necessary to succeed without limiting our ability to<br />
return cash to our investors in the form of dividends and share repurchases.<br />
We operate in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and<br />
Fire Control (MFC), Mission Systems and Training (MST) and Space Systems. We organize our business segments based on<br />
the nature of the products and services offered.<br />
Strategic Actions<br />
Acquisition of Sikorsky Aircraft Corporation<br />
On November 6, 2015, pursuant to a Stock Purchase Agreement, dated as of July 19, 2015 by and between us and United<br />
Technologies Corporation (UTC) and certain wholly-owned subsidiaries of UTC, we completed the acquisition of Sikorsky<br />
Aircraft Corporation (Sikorsky) for $9.0 billion, net of cash acquired. Sikorsky, a global company primarily engaged in the<br />
design, manufacture and support of military and commercial helicopters, has become a wholly-owned subsidiary of ours,<br />
aligned under the MST business segment. We funded the acquisition with new debt issuances, commercial paper and cash on<br />
hand. We and UTC made a joint election under Section 338(h)(10) of the Internal Revenue Code, which treats the transaction<br />
as an asset purchase for tax purposes. This election generates a cash tax benefit with an estimated net present value of<br />
$1.9 billion for us and our stockholders. The financial results of the acquired Sikorsky business have been included in our<br />
consolidated results of operations from the November 6, 2015 acquisition date through December 31, 2015. Accordingly, the<br />
consolidated financial results for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.<br />
Strategic Review of Government Information Technology (IT) and Technical Services Businesses<br />
Information Systems & Global Solutions Divestiture<br />
On January 26, 2016 we entered into definitive agreements to separate and combine our IS&GS business segment with<br />
Leidos Holdings, Inc. (Leidos) in a tax-efficient Reverse Morris Trust transaction anticipated to unlock approximately<br />
$5.0 billion in estimated enterprise value for our stockholders, including a $1.8 billion one-time special cash payment to us.<br />
We intend to use the net proceeds of the transaction to repay debt, pay dividends or repurchase our stock. Additionally, our<br />
stockholders will receive approximately 50.5 percent of the outstanding equity of Leidos on a fully diluted basis<br />
(approximately 77 million shares) with an estimated value of $3.2 billion based on Leidos’ stock price on the date of<br />
announcement. However, the actual value of the stock to be received by our stockholders will depend on the value of such<br />
shares at the time of closing of the transaction and our stockholders may receive more or less than the anticipated value. At<br />
our election, the distribution may be effected by means of a pro rata dividend in a spin-off transaction or in an exchange offer<br />
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for outstanding Lockheed Martin shares in a split-off transaction. The transaction structure, which is subject to market<br />
conditions, is currently contemplated to be a split-off transaction resulting in a decrease in our outstanding common shares<br />
and a significant book gain at closing. In a split-off transaction, only those stockholders that elect to participate will receive<br />
Leidos shares in the merger transaction, provided, that, if the exchange offer is not fully subscribed, Lockheed Martin will<br />
spin-off the remaining shares to be converted into Leidos stock in the merger pro rata.<br />
Subsequent to the program realignment described below, our IS&GS business segment represents the government IT and<br />
technical services businesses that were under strategic review. The transaction is expected to close in the third or fourth<br />
quarter of 2016. Until closing, IS&GS will operate as a business segment and financial results for the IS&GS business<br />
segment will be reported in our continuing operations.<br />
Program Realignment<br />
During the fourth quarter of 2015, we realigned certain programs among our business segments in connection with the<br />
strategic review of our government IT and technical services businesses. As part of the realignment:<br />
• command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) and government<br />
cyber programs were transferred from the IS&GS business segment to the MST business segment;<br />
• energy solutions programs were transferred from the IS&GS business segment to the MFC business segment;<br />
• space ground station programs were transferred from the IS&GS business segment to Space Systems business segment;<br />
and<br />
• technical services programs were transferred from the MFC business segment to the IS&GS business segment.<br />
In connection with the realignment, goodwill was reallocated between affected reporting units on a relative fair value<br />
basis. We performed goodwill impairment tests prior and subsequent to the realignment, and there was no indication of<br />
goodwill impairment.<br />
Subsequent to the program realignment, the government IT and technical services businesses that were under strategic<br />
review are now aligned under the IS&GS business segment.<br />
Business Segments<br />
The amounts, discussion and presentation of our business segments as set forth in this Annual Report on Form 10-K<br />
reflect the program realignment described above for all periods presented. The realignment did not impact our consolidated<br />
results of operations. See “Note 5 – Information on Business Segments” for additional information including revised<br />
historical segment results under our new structure.<br />
Aeronautics<br />
In 2015, our Aeronautics business segment generated net sales of $15.6 billion, which represented 34% of our total<br />
consolidated net sales. Aeronautics’ customers include the military services and various other government agencies of the<br />
U.S. and other countries. In 2015, U.S. Government customers accounted for 72% and international customers accounted for<br />
28% of Aeronautics’ net sales. Net sales from Aeronautics’ combat aircraft products and services represented 25%, 23%, and<br />
21% of our total consolidated net sales in 2015, 2014, and 2013.<br />
Aeronautics is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade<br />
of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies.<br />
Aeronautics’ major programs include:<br />
• F-35 Lightning II Joint Strike Fighter – international multi-role, multi-variant, fifth generation stealth fighter<br />
• C-130 Hercules – international tactical airlifter<br />
• F-16 Fighting Falcon – low-cost, combat-proven, international multi-role fighter<br />
• C-5M Super Galaxy – strategic airlifter<br />
• F-22 Raptor – air dominance and multi-mission fifth generation stealth fighter.<br />
The F-35 program is our largest program, generating 20% of our total consolidated net sales, as well as 59% of<br />
Aeronautics’ net sales in 2015. The F-35 program consists of development contracts, multiple production contracts, and<br />
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sustainment activities. The development contracts are being performed concurrent with the production contracts. Concurrent<br />
performance of development and production contracts is used for complex programs to test aircraft, shorten the time to field<br />
systems and achieve overall cost savings. We expect the System Development and Demonstration portion of the<br />
development contracts will be substantially complete in 2017, with less significant efforts continuing into 2019. Production<br />
of the aircraft is expected to continue for many years given the U.S. Government’s current inventory objective of<br />
2,443 aircraft for the Air Force, Marine Corps and Navy; commitments from our eight international partners and three<br />
international customers; as well as expressions of interest from other countries. During 2015, we delivered 45 aircraft to our<br />
U.S. and international partners, resulting in total deliveries of 154 production aircraft as of December 31, 2015. We have<br />
114 production aircraft in backlog as of December 31, 2015, including orders from our international partners. For additional<br />
information on the F-35 program, see “Status of the F-35 Program” in Management’s Discussion and Analysis of Financial<br />
Condition and Results of Operations.<br />
Aeronautics produces and provides support and sustainment services for the C-130J Super Hercules, as well as upgrades<br />
and support services for the legacy C-130 Hercules worldwide fleet. We delivered 21 C-130J aircraft in 2015, including one<br />
to international customers. We have 97 aircraft in our backlog as of December 31, 2015 with advanced funding from<br />
customers for additional C-130J aircraft not currently in backlog. Our C-130J backlog extends into 2020.<br />
Aeronautics currently produces F-16 aircraft for international customers. Aeronautics also provides service-life<br />
extension, modernization and other upgrade programs for our customers’ F-16 aircraft. We delivered 11 F-16 aircraft in<br />
2015. As of December 31, 2015, we have 20 F-16 aircraft in backlog with backlog extending into 2017.<br />
Aeronautics provides sustainment services for the existing U.S. Air Force C-5 Galaxy fleet and modernization activities<br />
to convert 49 C-5 Galaxy aircraft to the C-5M Super Galaxy configuration. These modernization activities include the<br />
installation of new engines, landing gear and systems and other improvements that enable a shorter takeoff, a higher climb<br />
rate, an increased cargo load and longer flight range. As of December 31, 2015, we had delivered 29 C-5M aircraft under<br />
these modernization activities, including nine C-5M aircraft delivered in 2015. As of December 31, 2015, we have<br />
20 C-5 aircraft in backlog with backlog extending into 2018.<br />
While production and deliveries of F-22 aircraft were completed in 2012, Aeronautics continues to provide<br />
modernization and sustainment activities for the U.S. Air Force’s F-22 aircraft fleet. The modernization program comprises<br />
upgrading existing systems requirements, developing new systems requirements, adding capabilities and enhancing the<br />
performance of the weapon systems. The sustainment program consists of sustaining the weapon systems of the F-22 fleet,<br />
providing training systems, customer support, integrated support planning, supply chain management, aircraft modifications<br />
and heavy maintenance, systems engineering and support products.<br />
In addition to the above aircraft programs, Aeronautics is involved in advanced development programs incorporating<br />
innovative design and rapid prototype applications. Our Advanced Development Programs (ADP) organization, also known<br />
as Skunk Works ® , is focused on future systems, including unmanned aerial systems and next generation capabilities for<br />
advanced strike, intelligence, surveillance, reconnaissance, situational awareness and air mobility. We continue to explore<br />
technology advancement and insertion in our existing aircraft. We also are involved in numerous network-enabled activities<br />
that allow separate systems to work together to increase effectiveness and we continue to invest in new technologies to<br />
maintain and enhance competitiveness in military aircraft design, development and production.<br />
Information Systems & Global Solutions<br />
In 2015, our IS&GS business segment generated net sales of $5.6 billion, which represented 12% of our total<br />
consolidated net sales. IS&GS’ customers include various government agencies of the U.S. and other countries, military<br />
services, as well as commercial and other customers. In 2015, U.S. Government customers accounted for 89%, international<br />
customers accounted for 9% and U.S. commercial and other customers accounted for 2% of IS&GS’ net sales. IS&GS has<br />
been impacted by the continued downturn in certain federal agencies’ information technology budgets and increased<br />
re-competition on existing contracts coupled with the fragmentation of large contracts into multiple smaller contracts that are<br />
awarded primarily on the basis of price.<br />
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IS&GS provides advanced technology systems and expertise, integrated information technology solutions and<br />
management services across a broad spectrum of applications for civil, defense, intelligence and other government<br />
customers. In addition, IS&GS supports the needs of customers in data analytics, data center operation and air traffic<br />
management. IS&GS provides network-enabled situational awareness and integrates complex global systems to help our<br />
customers gather, analyze and securely distribute critical data. While IS&GS has a portfolio of many smaller contracts, as<br />
compared to our other business segments, this business segment’s major programs include:<br />
• The Hanford Mission Support contract, a program to provide infrastructure and site support services to the Department of<br />
Energy.<br />
• The En Route Automation Modernization (ERAM) contract, a program to replace the Federal Aviation Administration’s<br />
infrastructure with a modern automation environment that includes new functions and capabilities.<br />
• QTC business that provides IT-enabled case management of outsourced medical evaluations for federal, state and<br />
commercial customers.<br />
• The National Science Foundation Antarctic Support program, which manages sites and equipment to enable universities,<br />
research institutions and federal agencies to conduct scientific research in the Antarctic.<br />
IS&GS’ Technical Services business, which has been realigned to IS&GS from our MFC business segment as part of our<br />
strategic review, provides a comprehensive portfolio of technical and sustainment services to enhance our customers’<br />
mission success, with core capabilities in engineering services; global aviation solutions; command, control,<br />
communications, computers, intelligence, surveillance and reconnaissance (C4ISR) product support; counter threat services;<br />
and education and sustainment services.<br />
Missiles and Fire Control<br />
In 2015, our MFC business segment generated net sales of $6.7 billion, which represented 14% of our total consolidated<br />
net sales. MFC’s customers include the military services, principally the U.S. Army, and various government agencies of the<br />
U.S. and other countries, as well as commercial and other customers. In 2015, U.S. Government customers accounted for<br />
61%, international customers accounted for 36% and U.S. commercial and other customers accounted for 3% of MFC’s net<br />
sales.<br />
MFC provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems;<br />
logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned<br />
and unmanned ground vehicles; and energy management solutions. MFC’s major programs include:<br />
• The Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) air and missile defense<br />
programs. PAC-3 is an advanced defensive missile for the U.S. Army and international customers designed to intercept<br />
and eliminate incoming airborne threats using kinetic energy. THAAD is a transportable defensive missile system for the<br />
U.S. Government and international customers designed to engage targets both within and outside of the Earth’s<br />
atmosphere.<br />
• The Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM) and Javelin<br />
tactical missile programs. MLRS is a highly mobile, automatic system that fires surface-to-surface rockets and missiles<br />
from the M270 and High Mobility Artillery Rocket System platforms produced for the U.S. Army and international<br />
customers. Hellfire is an air-to-ground missile used on rotary and fixed-wing aircraft, which is produced for the U.S.<br />
Army, Navy, Marine Corps and international customers. JASSM is an air-to-ground missile launched from fixed-wing<br />
aircraft, which is produced for the U.S. Air Force and international customers. Javelin is a shoulder-fired anti-armor<br />
rocket system, which is produced for the U.S. Army, Marine Corps and international customers.<br />
• The Apache, Sniper ® and Low Altitude Navigation and Targeting Infrared for Night (LANTIRN ® ) fire control systems<br />
programs. The Apache fire control system provides weapons targeting capability for the Apache helicopter for the U.S.<br />
Army and international customers. Sniper ® is a targeting system for several fixed-wing aircraft and LANTIRN ® is a<br />
combined navigation and targeting system for several fixed-wing aircraft. Both Sniper ® and LANTIRN ® are produced for<br />
the U.S. Air Force and international customers.<br />
• The Special Operations Forces Contractor Logistics Support Services (SOF CLSS) program provides logistics support<br />
services to the special operations forces of the U.S. military.<br />
Mission Systems and Training<br />
In 2015, our MST business segment generated net sales of $9.1 billion, which represented 20% of our total consolidated<br />
net sales. MST’s customers include the military services, principally the U.S. Navy, and various government agencies of the<br />
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U.S. and other countries, as well as commercial and other customers. In 2015, U.S. Government customers accounted for<br />
77%, international customers accounted for 22% and U.S. commercial and other customers accounted for 1% of MST’s net<br />
sales.<br />
MST provides design, manufacture, service and support for a variety of military and civil helicopters; ship and<br />
submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based<br />
missile defense systems; radar systems; the Littoral Combat Ship (LCS); simulation and training services; and unmanned<br />
systems and technologies. In addition, MST supports the needs of customers in cybersecurity and delivers communications<br />
and command and control capabilities through complex mission solutions for defense applications.<br />
On November 6, 2015, we acquired Sikorsky and aligned the Sikorsky business under our MST business segment. The<br />
results of the acquired Sikorsky business have been included in our financial results from the period subsequent to the<br />
completion of the acquisition on November 6, 2015. Accordingly, our consolidated operating results and MST business<br />
segment operating results for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.<br />
Sikorsky is one of the world’s largest helicopter companies and manufactures military and commercial helicopters.<br />
Sikorsky designs, manufactures, services and supports military and commercial helicopters. Current major production<br />
programs include the UH-60M Black Hawk medium-transport helicopter and HH-60M medical evacuation helicopter for the<br />
U.S. and foreign governments, the S-70 Black Hawk for foreign governments, the MH-60S Seahawk helicopter for the U.S.<br />
Navy and the MH-60R Seahawk helicopter for the U.S. and foreign navies, the S-70B Seahawk helicopter for foreign naval<br />
missions, and the S-76 and S-92 helicopters for commercial operations. Sikorsky is also developing the CH-53K next<br />
generation heavy lift helicopter for the U.S. Marine Corps, the VH-92A helicopter for the U.S. Marine One transport<br />
mission, and the HH-60W combat rescue helicopter for the U.S. Air Force. Sikorsky is also developing the<br />
CH-148 derivative of the H-92 helicopter, a military variant of the S-92 helicopter, for the Canadian Government.<br />
Additionally, Sikorsky offers full-spectrum aftermarket service and support solutions to commercial and military customers<br />
worldwide. Aftermarket service and support solutions include spare parts sales, mission equipment, modifications and<br />
upgrades, overhaul and repair services, maintenance contracts and logistics support programs for helicopters and other<br />
aircraft.<br />
MST’s other major programs include:<br />
• The Aegis Combat System serves as a fleet ballistic missile defense system for the U.S. Navy and international customers<br />
and is also a sea and land-based element of the U.S. missile defense system.<br />
• The LCS, a surface combatant ship for the U.S. Navy designed to operate in shallow waters and the open ocean.<br />
• The Space Fence system, an advanced ground-based radar system for the U.S. Air Force designed to enhance the way<br />
objects are tracked in space and increase the ability to prevent space-based collisions.<br />
• The Advanced Hawkeye Radar System, an airborne early warning radar, which MST provides for the E2-C/E2-D aircraft<br />
produced for the U.S. Navy and international customers.<br />
• The TPQ-53 Radar System, a sensor that quickly locates and neutralizes mortar and rocket threats, produced for the U.S.<br />
Army and international customers.<br />
Space Systems<br />
In 2015, our Space Systems business segment generated net sales of $9.1 billion, which represented 20% of our total<br />
consolidated net sales. Space Systems’ customers include various U.S. government agencies and commercial customers. In<br />
2015, U.S. Government customers accounted for 97%, international customers accounted for 2% and U.S. commercial and<br />
other customers accounted for 1% of Space Systems’ net sales. Net sales from Space Systems’ satellite products and services<br />
represented 11% of our total consolidated net sales in 2015 and 12% in both 2014 and 2013.<br />
Space Systems is engaged in the research and development, design, engineering and production of satellites, strategic<br />
and defensive missile systems and space transportation systems. Space Systems provides network-enabled situational<br />
awareness and integrates complex global systems to help our customers gather, analyze and securely distribute critical<br />
intelligence data. Space Systems is also responsible for various classified systems and services in support of vital national<br />
security systems. Space Systems’ major programs include:<br />
• The Trident II D5 Fleet Ballistic Missile, a program with the U.S. Navy for the only submarine-launched intercontinental<br />
ballistic missile currently in production in the U.S.<br />
• The Orion Multi-Purpose Crew Vehicle (Orion), a spacecraft for the National Aeronautics and Space Administration<br />
(NASA) utilizing new technology for human exploration missions beyond low earth orbit.<br />
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• The Space Based Infrared System (SBIRS), which provides the U.S. Air Force with enhanced worldwide missile launch<br />
detection and tracking capabilities.<br />
• The Advanced Extremely High Frequency (AEHF) system, the next generation of highly secure communications satellites<br />
for the U.S. Air Force.<br />
• Global Positioning System (GPS) III, a program to modernize the GPS satellite system for the U.S. Air Force.<br />
• The Geostationary Operational Environmental Satellite R-Series (GOES-R), which is the National Oceanic and<br />
Atmospheric Association’s next generation of meteorological satellites.<br />
• The Mobile User Objective System (MUOS), a next-generation narrow-band satellite communication system for the U.S.<br />
Navy.<br />
Operating profit for our Space Systems business segment includes our share of earnings for our 50% ownership interest<br />
in United Launch Alliance (ULA).<br />
Financial and Other Business Segment Information<br />
For additional information regarding our business segments, including comparative segment net sales, operating profit<br />
and related financial information for 2015, 2014, and 2013, see “Business Segment Results of Operations” in Management’s<br />
Discussion and Analysis of Financial Condition and Results of Operations and “Note 5 – Information on Business Segments”<br />
of our consolidated financial statements.<br />
Competition<br />
Our broad portfolio of products and services competes both domestically and internationally against products and<br />
services of other large aerospace, defense and information technology companies, as well as numerous smaller competitors,<br />
particularly in certain of our services businesses. We often form teams with our competitors in efforts to provide our<br />
customers with the best mix of capabilities to address specific requirements. In some areas of our business, customer<br />
requirements are changing to encourage expanded competition, such as information technology contracts where there may be<br />
a wide range of small to large contractors bidding on procurements. Additionally, information technology procurements are<br />
increasingly focusing on price over other factors of competition. Principal factors of competition include the value of our<br />
products and services to the customer; technical and management capability; the ability to develop and implement complex,<br />
integrated system architectures; total cost of ownership; our demonstrated ability to execute and perform against contract<br />
requirements; and our ability to provide timely solutions.<br />
The competition for international sales is generally subject to U.S. Government stipulations (e.g., export restrictions,<br />
market access, technology transfer, industrial cooperation and contracting practices). We may compete against U.S. and non-<br />
U.S. companies (or teams) for contract awards by international governments. International competitions also may be subject<br />
to different laws or contracting practices of international governments that may affect how we structure our bid for the<br />
procurement. In many international procurements, the purchasing government’s relationship with the U.S. and its industrial<br />
cooperation programs are also important factors in determining the outcome of a competition. It is common for international<br />
customers to require contractors to comply with their industrial cooperation regulations, sometimes referred to as offset<br />
requirements, and we have entered into foreign offset agreements as part of securing some international business. For more<br />
information concerning offset agreements, see “Contractual Commitments and Off-Balance Sheet Arrangements” in<br />
Management’s Discussion and Analysis of Financial Condition and Results of Operations.<br />
Patents<br />
We routinely apply for and own a substantial number of U.S. and international patents related to the products and<br />
services we provide. In addition to owning a large portfolio of intellectual property, we also license intellectual property to<br />
and from third parties. The U.S. Government has licenses in our patents that are developed in performance of government<br />
contracts and it may use or authorize others to use the inventions covered by these patents for government purposes.<br />
Unpatented research, development and engineering skills also make an important contribution to our business. Although our<br />
intellectual property rights in the aggregate are important to the operation of our business, we do not believe that any existing<br />
patent, license or other intellectual property right is of such importance that its loss or termination would have a material<br />
adverse effect on our business taken as a whole.<br />
Raw Materials and Seasonality<br />
Certain of our products require relatively scarce raw materials. Historically, we have been successful in obtaining the<br />
raw materials and other supplies needed in our manufacturing processes. We seek to manage raw materials supply risk<br />
through long-term contracts and by maintaining an acceptable level of the key materials in inventories.<br />
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Aluminum and titanium are important raw materials used in certain of our Aeronautics and Space Systems programs.<br />
Long-term agreements have helped enable a continued supply of aluminum and titanium. Carbon fiber is an important<br />
ingredient in composite materials used in our Aeronautics programs, such as the F-35 aircraft. Aluminum lithium, which we<br />
use for F-16 aircraft structural components, is currently only available from limited sources. We have been advised by some<br />
suppliers that pricing and the timing of availability of materials in some commodities markets can fluctuate widely. These<br />
fluctuations may negatively affect the price and availability of certain materials. While we do not anticipate material<br />
problems regarding the supply of our raw materials and believe that we have taken appropriate measures to mitigate these<br />
variations, if key materials become unavailable or if pricing fluctuates widely in the future, it could result in delay of one or<br />
more of our programs, increased costs or reduced operating profits.<br />
No material portion of our business is considered to be seasonal. Various factors can affect the distribution of our sales<br />
between accounting periods, including the timing of government awards, the availability of government funding, product<br />
deliveries and customer acceptance.<br />
Government Contracts and Regulations<br />
Our business is heavily regulated. We contract with numerous U.S. Government agencies and entities, including all<br />
branches of the U.S. military, the departments of Defense, Homeland Security, Justice, Commerce, Health and Human<br />
Services, Transportation and Energy, the U.S. Postal Service, the Social Security Administration, the Federal Aviation<br />
Administration, NASA, the U.S. Environmental Protection Agency and Veterans Affairs. Similar government authorities<br />
exist in other countries and regulate our international efforts.<br />
We must comply with, and are affected by, laws and regulations relating to the formation, administration and<br />
performance of U.S. Government and other contracts. These laws and regulations, among other things:<br />
• require certification and disclosure of all cost or pricing data in connection with certain types of contract negotiations;<br />
• impose specific and unique cost accounting practices that may differ from U.S. generally accepted accounting principles;<br />
• impose acquisition regulations, which may change or be replaced over time, that define allowable and unallowable costs<br />
and otherwise govern our right to reimbursement under certain cost-based U.S. Government contracts;<br />
• require specific security controls to protect DoD controlled unclassified technical information and restrict the use and<br />
dissemination of information classified for national security purposes and the export of certain products, services and<br />
technical data; and<br />
• require the review and approval of contractor business systems, defined in the regulations as: (i) Accounting System;<br />
(ii) Estimating System; (iii) Earned Value Management System, for managing cost and schedule performance on certain<br />
complex programs; (iv) Purchasing System; (v) Material Management and Accounting System, for planning, controlling<br />
and accounting for the acquisition, use, issuing and disposition of material; and (vi) Property Management System.<br />
The U.S. Government may terminate any of our government contracts and subcontracts either at its convenience or for<br />
default based on our performance. If a contract is terminated for convenience, we generally are protected by provisions<br />
covering reimbursement for costs incurred on the contract and profit on those costs. If a contract is terminated for default, we<br />
generally are entitled to payments for our work that has been accepted by the U.S. Government; however, the U.S.<br />
Government could make claims to reduce the contract value or recover its procurement costs and could assess other special<br />
penalties. For more information regarding the U.S. Government’s right to terminate our contracts, see Item 1A – Risk<br />
Factors. For more information regarding government contracting laws and regulations, see Item 1A – Risk Factors as well as<br />
“Critical Accounting Policies – Contract Accounting / Sales Recognition” in Management’s Discussion and Analysis of<br />
Financial Condition and Results of Operations.<br />
A portion of our business is classified by the U.S. Government and cannot be specifically described. The operating<br />
results of these classified contracts are included in our consolidated financial statements. The business risks associated with<br />
classified contracts historically have not differed materially from those of our other U.S. Government contracts. Our internal<br />
controls addressing the financial reporting of classified contracts are consistent with our internal controls for our nonclassified<br />
contracts.<br />
Our operations are subject to and affected by various federal, state, local and foreign environmental protection laws and<br />
regulations regarding the discharge of materials into the environment or otherwise regulating the protection of the<br />
environment. While the extent of our financial exposure cannot in all cases be reasonably estimated, the costs of<br />
environmental compliance have not had, and we do not expect that these costs will have, a material adverse effect on our<br />
earnings, financial position and cash flow, primarily because most of our environmental costs are allowable in establishing<br />
9
the price of our products and services under our contracts with the U.S. Government. For information regarding these<br />
matters, including current estimates of the amounts that we believe are required for remediation or cleanup to the extent that<br />
they are probable and estimable, see “Critical Accounting Policies – Environmental Matters” in Management’s Discussion<br />
and Analysis of Financial Condition and Results of Operations and “Note 14 – Legal Proceedings, Commitments and<br />
Contingencies” of our consolidated financial statements. See also the discussion of environmental matters within Section<br />
1A – Risk Factors.<br />
Backlog<br />
At December 31, 2015, our backlog was $99.6 billion compared with $80.5 billion at December 31, 2014. Backlog at<br />
December 31, 2015 includes $15.6 billion related to Sikorsky and $4.8 billion related to our IS&GS business segment, which<br />
we plan to divest in 2016. Sikorsky backlog may change as we complete our acquired backlog analysis. Backlog is converted<br />
into sales in future periods as work is performed or deliveries are made. Approximately $43.0 billion, or 43%, of our backlog<br />
at December 31, 2015 is expected to be converted into sales in 2016.<br />
Our backlog includes both funded (firm orders for our products and services for which funding has been both authorized<br />
and appropriated by the customer – Congress, in the case of U.S. Government agencies) and unfunded (firm orders for which<br />
funding has not been appropriated) amounts. We do not include unexercised options or potential orders under indefinitedelivery,<br />
indefinite-quantity agreements in our backlog. If any of our contracts with firm orders were to be terminated, our<br />
backlog would be reduced by the expected value of the unfilled orders of such contracts. Our backlog would also be reduced<br />
in connection with the planned divestiture of our IS&GS business segment. Funded backlog was $70.7 billion at<br />
December 31, 2015, as compared to $56.5 billion at December 31, 2014. For backlog related to each of our business<br />
segments, see “Business Segment Results of Operations” in Management’s Discussion and Analysis of Financial Condition<br />
and Results of Operations.<br />
Research and Development<br />
We conduct research and development (R&D) activities under customer-sponsored contracts and with our own<br />
independent R&D funds. Our independent R&D costs include basic research, applied research, development, systems and<br />
other concept formulation studies. Generally, these costs are allocated among all contracts and programs in progress under<br />
U.S. Government contractual arrangements. Costs we incur under customer-sponsored R&D programs pursuant to contracts<br />
are included in net sales and cost of sales. Under certain arrangements in which a customer shares in product development<br />
costs, our portion of the unreimbursed costs is expensed as incurred in cost of sales. Independent R&D costs charged to cost<br />
of sales were $839 million in 2015, $751 million in 2014, and $697 million in 2013. See “Research and development and<br />
similar costs” in “Note 1 – Significant Accounting Policies” of our consolidated financial statements.<br />
Employees<br />
At December 31, 2015, we had approximately 126,000 employees, about 93% of whom were located in the U.S.<br />
Approximately 18% of our employees are covered by collective bargaining agreements with various unions. A number of our<br />
existing collective bargaining agreements expire in any given year. Historically, we have been successful in negotiating<br />
renewals to expiring agreements without any material disruption of operating activities. Management considers employee<br />
relations to be good.<br />
Available Information<br />
We are a Maryland corporation formed in 1995 by combining the businesses of Lockheed Corporation and Martin<br />
Marietta Corporation. Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817. Our<br />
telephone number is (301) 897-6000 and our website home page is at www.lockheedmartin.com. We make our website<br />
content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated<br />
by reference into this Annual Report on Form 10-K (Form 10-K).<br />
Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the U.S.<br />
Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in this<br />
manner.<br />
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for<br />
our annual stockholders’ meetings and amendments to those reports are available free of charge on our website,<br />
10
www.lockheedmartin.com/investor, as soon as reasonably practical after we electronically file the material with, or furnish it<br />
to, the SEC. In addition, copies of our annual report will be made available, free of charge, upon written request. The SEC<br />
also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC<br />
registrants, including Lockheed Martin Corporation.<br />
Forward-Looking Statements<br />
This Form 10-K contains statements that, to the extent they are not recitations of historical fact, constitute forwardlooking<br />
statements within the meaning of the federal securities laws and are based on our current expectations and<br />
assumptions. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “scheduled,”<br />
“forecast” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees<br />
of future performance and are subject to risks and uncertainties.<br />
Statements and assumptions with respect to future sales, income and cash flows, program performance, the outcome of<br />
litigation, anticipated pension cost and funding, environmental remediation cost estimates, planned acquisitions or<br />
dispositions of assets, or the anticipated consequences are examples of forward-looking statements. Numerous factors,<br />
including the risk factors described in the following section, could affect our forward-looking statements and actual<br />
performance.<br />
Our actual financial results likely will be different from those projected due to the inherent nature of projections. Given<br />
these uncertainties, forward-looking statements should not be relied on in making investment decisions. The forward-looking<br />
statements contained in this Form 10-K speak only as of the date of its filing. Except where required by applicable law, we<br />
expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-K to reflect<br />
subsequent events, changed circumstances, changes in expectations, or the estimates and assumptions associated with them.<br />
The forward-looking statements in this Form 10-K are intended to be subject to the safe harbor protection provided by the<br />
federal securities laws.<br />
ITEM 1A. Risk Factors.<br />
An investment in our common stock or debt securities involves risks and uncertainties. We seek to identify, manage and<br />
mitigate risks to our business, but risk and uncertainty cannot be eliminated or necessarily predicted. The outcome of one or<br />
more of these risks could have a material effect on our operating results, financial position, or cash flows. You should<br />
carefully consider the following factors, in addition to the other information contained in this Annual Report on Form 10-K,<br />
before deciding to purchase our common stock or debt securities.<br />
We depend heavily on contracts with the U.S. Government for a substantial portion of our business.<br />
We derived 78% of our total net sales from the U.S. Government in 2015, including 58% from the Department of<br />
Defense (DoD). We expect to continue to derive most of our sales from work performed under U.S. Government contracts.<br />
Those contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually<br />
appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently,<br />
contracts are often partially funded initially and additional funds are committed only as Congress makes further<br />
appropriations. If we incur costs in excess of funds obligated on a contract, we may be at risk for reimbursement of those<br />
costs unless and until additional funds are obligated to the contract.<br />
As discussed within the “Industry Considerations” in Management’s Discussion and Analysis of Financial Condition and<br />
Results of Operations, the U.S. Government continues to face significant deficit reduction pressures and it is likely that<br />
discretionary spending by the U.S. Government will remain constrained for a number of years. Under such conditions, large<br />
or complex programs, which consist of multiple contracts and phases, are potentially subject to increased scrutiny. Our<br />
largest program, the F-35, represented 20% of our total net sales in 2015 and is expected to represent a higher percentage of<br />
our sales in future years. A decision to cut spending or reduce planned orders could have an adverse impact on our results of<br />
operations. For more information regarding the F-35 program, see “Status of the F-35 Program” in Management’s Discussion<br />
and Analysis of Financial Condition and Results of Operations.<br />
Based upon our diverse range of defense, homeland security and information technology products and services, we<br />
believe that this makes it less likely that cuts in any specific contract or program will have a long-term effect on our business.<br />
However, termination of multiple or large programs or contracts could adversely affect our business and future financial<br />
performance. Potential changes in funding priorities may afford new or additional opportunities for our businesses in terms<br />
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of existing, follow-on or replacement programs. While we would expect to compete and be well positioned as the incumbent<br />
on existing programs, we may not be successful or the replacement programs may be funded at lower levels.<br />
Generally, we expect that the impact of budget reductions on our operating results will lag in certain of our businesses<br />
with longer cycles such as our Aeronautics and Space Systems business segments and in our products businesses within our<br />
Missiles and Fire Control (MFC) and Mission Systems and Training (MST) business segments due to our production contract<br />
backlog. However, our businesses with smaller, short-term contracts are the most susceptible to the impacts of budget<br />
reductions, such as our Information Systems & Global Solutions (IS&GS) business segment. We have also experienced<br />
increased market pressures in these services businesses including lower in-theater support as troop levels are drawn down<br />
and increased re-competition on existing contracts coupled with the fragmentation of large contracts into multiple smaller<br />
contracts that are awarded primarily on the basis of price. Additionally, our services businesses across most of our business<br />
segments have experienced lower volume due to improved product field performance that require less service support.<br />
Changes in our business environment require us to be agile and evolve our business models, processes and products.<br />
We are subject to a number of procurement laws and regulations. Our business and our reputation could be adversely<br />
affected if we fail to comply with these laws.<br />
We must comply with and are affected by laws and regulations relating to the award, administration and performance of<br />
U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and<br />
impose certain risks and costs on our business. A violation of specific laws and regulations, by us, a supplier or a venture<br />
partner, could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts,<br />
suspension or debarment from bidding on or being awarded contracts, loss of our ability to export products or services and<br />
civil or criminal investigations or proceedings.<br />
In some instances, these laws and regulations impose terms or rights that are different from those typically found in<br />
commercial transactions. For example, the U.S. Government may terminate any of our government contracts and<br />
subcontracts either at its convenience or for default based on our performance. Upon termination for convenience of a fixedprice<br />
type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable<br />
costs for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance<br />
would have resulted in a loss.<br />
Upon termination for convenience of a cost-reimbursable contract, we normally are entitled to reimbursement of<br />
allowable costs plus a portion of the fee. Allowable costs would include our cost to terminate agreements with our suppliers<br />
and subcontractors. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to<br />
termination and is determined by negotiation. We attempt to ensure that adequate funds are available by notifying the<br />
customer when its estimated costs, including those associated with a possible termination for convenience, approach levels<br />
specified as being allotted to its programs. As funds are typically appropriated on a fiscal-year basis and as the costs of a<br />
termination for convenience may exceed the costs of continuing a program in a given fiscal year, occasionally programs do<br />
not have sufficient funds appropriated to cover the termination costs were the government to terminate them for convenience.<br />
Under such circumstances, the U.S. Government could assert that it is not required to appropriate additional funding.<br />
A termination arising out of our default may expose us to liability and have a material adverse effect on our ability to<br />
compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the<br />
prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor,<br />
notwithstanding the quality of our services as a subcontractor. In the case of termination for default, the U.S. Government<br />
could make claims to reduce the contract value or recover its procurement costs and could assess other special penalties.<br />
However, under such circumstances we have rights and remedial actions under laws and the Federal Acquisition Regulation<br />
(FAR).<br />
In addition, certain of our U.S. Government contracts span one or more base years and multiple option years. The U.S.<br />
Government generally has the right not to exercise option periods and may not exercise an option period for various reasons.<br />
However, the U.S. Government may exercise option periods, even for contracts for which it is expected that our costs may<br />
exceed the contract price or ceiling.<br />
U.S. Government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency<br />
and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a<br />
contractor’s performance under its contracts, its cost structure, its business systems and compliance with applicable laws,<br />
regulations and standards. Any costs found to be misclassified may be subject to repayment. We have unaudited and/or<br />
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unsettled incurred cost claims related to past years, which places risk on our ability to issue final billings on contracts for<br />
which authorized and appropriated funds may be expiring.<br />
Certain deficiencies identified during government audits of contractor business systems may result in the government<br />
withholding payments on our billings. Such deficiencies have not impacted our internal control over financial reporting.<br />
Withholding payments on billings are capped at 5% of billings when deficiencies impact a single business system and<br />
10% when deficiencies impact multiple systems. Such withholdings are typically reduced to 2% after the contractor’s<br />
corrective action plan has been accepted and progress to implement the corrective actions has been demonstrated, and<br />
withholdings are withdrawn upon satisfactory completion and verification of the corrective action plan.<br />
If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and<br />
administrative sanctions, including reductions of the value of contracts, contract modifications or terminations, forfeiture of<br />
profits, suspension of payments, penalties, fines and suspension, or prohibition from doing business with the U.S.<br />
Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.<br />
Similar government oversight exists in most other countries where we conduct business.<br />
Our profitability and cash flow may vary based on the mix of our contracts and programs, our performance, our<br />
ability to control costs and evolving U.S. Government procurement policies.<br />
Our profitability and cash flow may vary materially depending on the types of government contracts undertaken, the<br />
nature of products produced or services performed under those contracts, the costs incurred in performing the work, the<br />
achievement of other performance objectives and the stage of performance at which the right to receive fees is determined,<br />
particularly under award and incentive-fee contracts.<br />
Our backlog includes a variety of contract types that are intended to address changing risk and reward profiles as a<br />
program matures. Contract types include cost-reimbursable, fixed-price incentive-fee, fixed-price and time-and-materials<br />
contracts. Contracts for development programs with complex design and technical challenges are typically cost-reimbursable.<br />
Under cost-reimbursable contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or<br />
performance-based. In these cases, the associated financial risks primarily relate to a reduction in fees and the program could<br />
be cancelled if cost, schedule or technical performance issues arise.<br />
Other contracts in backlog are for the transition from development to production (e.g., low-rate initial production (LRIP)<br />
contracts), which includes the challenge of starting and stabilizing a manufacturing production and test line while the final<br />
design is being validated. These generally are cost-reimbursable or fixed-price incentive-fee contracts. Under a fixed-price<br />
incentive-fee contract, the allowable costs incurred are eligible for reimbursement but are subject to a cost-share<br />
arrangement, which affects profitability. Generally, if our costs exceed the contract target cost or are not allowable under the<br />
applicable regulations, we may not be able to obtain reimbursement for all costs and may have our fees reduced or<br />
eliminated.<br />
There are also contracts for production, as well as operations and maintenance of the delivered products, that have the<br />
challenge of achieving a stable production and delivery rate, while maintaining operability of the product after delivery.<br />
These contracts are mainly fixed-price, although some operations and maintenance contracts are time-and-materials type.<br />
Under fixed-price contracts, we receive a fixed price regardless of the actual costs we incur. We have to absorb any costs in<br />
excess of the fixed price. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for<br />
certain expenses.<br />
The failure to perform to customer expectations and contract requirements may result in reduced fees or losses and affect<br />
our financial performance in that period. Under each type of contract, if we are unable to control costs, our operating results<br />
could be adversely affected, particularly if we are unable to justify an increase in contract value to our customers. Cost<br />
overruns or the failure to perform on existing programs also may adversely affect our ability to retain existing programs and<br />
win future contract awards.<br />
The U.S. Government is currently pursuing and implementing policies that could negatively impact our profitability.<br />
Changes in procurement policy favoring more incentive-based fee arrangements, different award fee criteria or government<br />
contract negotiation offers that indicate what our costs should be may affect the predictability of our profit rates. Our<br />
customers are subject to pressures that may result in a change in contract types referenced above earlier in a program’s<br />
maturity than is traditional. An example of this is the use of fixed-price incentive-fee contracts for recent LRIP contracts on<br />
the F-35 program while the development contract is being performed concurrently. Our customers also may pursue non-<br />
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traditional contract provisions in negotiation of contracts. For example, changes resulting from the F-35 development<br />
contract may need to be implemented on the production contracts, a concept referred to as concurrency, which may require<br />
us to pay for a portion of the concurrency costs. An example of customer budget pressures includes the U.S. Government<br />
requiring that bid and proposal costs be included in general and administrative costs, rather than charged directly to contracts<br />
in certain circumstances.<br />
Other policies could negatively impact our working capital and cash flow. For example, the government has expressed a<br />
preference for requiring progress payments rather than performance based payments on new fixed-price contracts, which if<br />
implemented, delays our ability to recover a significant amount of costs incurred on a contract and thus affects the timing of<br />
our cash flows.<br />
Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain<br />
our financial performance and customer relationships.<br />
We are facing increased competition, particularly in information technology at our IS&GS business segment and<br />
cybersecurity at our MST business segment, from non-traditional competitors outside of the aerospace and defense industry.<br />
At the same time, our customers are facing budget constraints, trying to do more with less by cutting costs, identifying more<br />
affordable solutions, performing certain work internally rather than hiring a contractor, and reducing product development<br />
cycles. We have also experienced increased market pressures in our services businesses due to the fragmentation of large<br />
contracts into multiple smaller contracts that are awarded primarily on the basis of price. It is critical we maintain strong<br />
customer relationships and seek to understand the priorities of their requirements in this price competitive environment.<br />
In international sales, we face substantial competition from both U.S. manufacturers and international manufacturers<br />
whose governments sometimes provide research and development assistance, marketing subsidies and other assistance for<br />
their products. Additionally, our competitors are also focusing on increasing their international sales to partially mitigate the<br />
effect of reduced U.S. Government budgets. To remain competitive, we consistently must maintain strong customer<br />
relationships and provide superior performance, advanced technology solutions and service at an affordable cost and with the<br />
agility that our customers require to satisfy their mission objectives.<br />
A substantial portion of our business is awarded through competitive bidding. The U.S. Government increasingly has<br />
relied upon competitive contract award types, including indefinite-delivery, indefinite-quantity, GSA Schedule and other<br />
multi-award contracts, which has the potential to create pricing pressure and increase our cost by requiring that we submit<br />
multiple bids and proposals. In addition, multi-award contracts require that we make sustained efforts to obtain task orders<br />
under the contract. The competitive bidding process entails substantial costs and managerial time to prepare bids and<br />
proposals for contracts that may not be awarded to us or may be split among competitors. Following award, we may<br />
encounter significant expenses, delays, contract modifications or bid protests from unsuccessful bidders on new program<br />
awards. Unsuccessful bidders are more frequently protesting in the hope of being awarded a subcontract for a portion of the<br />
work in return for withdrawing the protest. Bid protests could result in significant expenses to us, contract modifications or<br />
even loss of the contract award. Even where a bid protest does not result in the loss of a contract award, the resolution can<br />
extend the time until the contract activity can begin and, as a result, delay our recognizing sales. We also may not be<br />
successful in our efforts to protest or challenge any bids for contracts that were not awarded to us and we could incur<br />
significant time and expense in such efforts.<br />
We are the prime contractor on most of our contracts and if our subcontractors, suppliers or teaming agreement or<br />
venture partners fail to perform their obligations, our performance and our ability to win future business could be<br />
harmed.<br />
For most of our contracts we rely on other companies to provide materials, major components and products, and to<br />
perform a portion of the services that we provide to our customers. Such arrangements may involve subcontracts, teaming<br />
arrangements, ventures or supply agreements with other companies upon which we rely (contracting parties). There is a risk<br />
that we may have disputes with our contracting parties, including disputes regarding the quality and timeliness of work<br />
performed, the workshare provided to that party, customer concerns about the other party’s performance, our failure to<br />
extend existing task orders or issue new task orders, or our hiring the personnel of a subcontractor, teammate or venture<br />
partner or vice versa. In addition, changes in the economic environment, including defense budgets and constraints on<br />
available financing, may adversely affect the financial stability of our contracting parties and their ability to meet their<br />
performance requirements or to provide needed supplies on a timely basis. A failure, for whatever reason, by one or more of<br />
our contracting parties to provide the agreed-upon supplies or perform the agreed-upon services on a timely basis may affect<br />
our ability to perform our obligations and require that we transition the work to other companies. Contracting party<br />
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performance deficiencies may affect our operating results and could result in a customer terminating our contract for default<br />
or convenience. A default termination could expose us to liability and affect our ability to compete for future contracts and<br />
orders. Additionally, our efforts to increase the efficiency of our operations and improve the affordability of our products and<br />
services could negatively impact our ability to attract and retain suppliers.<br />
International sales may pose different risks.<br />
In 2015, 21% of our total net sales were from international customers. We have a strategy to grow international sales<br />
over the next several years, inclusive of sales of F-35 aircraft to our international partners and other countries. International<br />
sales are subject to numerous political and economic factors, regulatory requirements, significant competition and other risks<br />
associated with doing business in foreign countries. Our exposure to such risks increased as a result of our acquisition of<br />
Sikorsky and may further increase if our international sales grow as we anticipate.<br />
Our international business is conducted through foreign military sales (FMS) contracted through the U.S. Government or<br />
by direct commercial sales (DCS) with international customers. In 2015, approximately 62% of our sales to international<br />
customers were FMS and about 38% were DCS. These transaction types differ as FMS transactions represent sales by the<br />
U.S. Government to international governments and our contract with the U.S. Government is subject to FAR. By contrast,<br />
DCS transactions represent sales directly to another international government or commercial customer. All sales to<br />
international customers are subject to U.S. and foreign laws and regulations, including, without limitation, regulations<br />
relating to anti-corruption, import-export control, technology transfer restrictions, taxation, repatriation of earnings, exchange<br />
controls, the Foreign Corrupt Practices Act and other anti-corruption laws, and the anti-boycott provisions of the U.S. Export<br />
Administration Act. While we have stringent policies in place to comply with such laws and regulations, failure by us, our<br />
employees or others working on our behalf to comply with these laws and regulations could result in administrative, civil, or<br />
criminal liabilities, including suspension, debarment from bidding for or performing government contracts, or suspension of<br />
our export privileges, which could have a material adverse effect on us. We frequently team with international subcontractors<br />
and suppliers who are also exposed to similar risks.<br />
While international sales, whether contracted as FMS or DCS, present risks that are different and potentially greater than<br />
those encountered in our U.S. business, DCS with international customers may impose even greater risks. DCS transactions<br />
involve commercial relationships with parties with whom we have less familiarity and where there may be significant<br />
cultural differences. Additionally, international procurement rules and regulations, contract laws and regulations, and<br />
contractual terms differ from those in the U.S. and are less familiar to us. International regulations may be interpreted by<br />
foreign courts less bound by precedent and with more discretion; these interpretations frequently have terms less favorable to<br />
us than the FAR. Export and import, tax and currency risk also may be increased for DCS with international customers.<br />
While these risks are potentially greater than those encountered in our U.S. business, the pricing of our products and services<br />
is commensurate with the risk profile on DCS with international customers.<br />
Our international business is highly sensitive to changes in regulations, political environments or security risks that may<br />
affect our ability to conduct business outside of the U.S., including those regarding investment, procurement, taxation and<br />
repatriation of earnings. Our international business also may be impacted by changes in foreign national priorities, foreign<br />
government budgets, global economic conditions, and fluctuations in foreign currency exchange rates. Our acquisition of<br />
Sikorsky is expected to increase our international sales further exposing us to the risks of international business. Sales of<br />
military products are also affected by defense budgets and U.S. foreign policy. Additionally, the timing of orders from our<br />
international customers can be less predictable than for our U.S. customers and may lead to fluctuations in the amount<br />
reported each year for our international sales.<br />
In conjunction with defense procurements, some international customers require contractors to comply with industrial<br />
cooperation regulations, including entering into industrial cooperation agreements, sometimes referred to as offset<br />
agreements. Offset agreements may require in-country purchases, technology transfers, local manufacturing support,<br />
investments in foreign joint ventures and financial support projects as an incentive or as a condition to a contract award. In<br />
some countries, these offset agreements may require the establishment of a venture with a local company, which must control<br />
the venture. The costs to satisfy our offset obligations are included in the estimates of our total costs to complete the contract<br />
and may impact our profitability and cash flows. The ability to recover investments that we make is generally dependent<br />
upon the successful operation of ventures that we do not control and may involve products and services that are dissimilar to<br />
our business activities. In these and other situations, we could be liable for violations of law for actions taken by these<br />
entities such as laws related to anti-corruption, import and export, and anti-boycott restrictions. Offset agreements generally<br />
extend over several years and may provide for penalties in the event we fail to perform in accordance with the offset<br />
requirements which are typically subjective and can be outside our control.<br />
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Our business could be negatively affected by cyber or other security threats or other disruptions.<br />
We routinely experience cybersecurity threats, threats to our information technology infrastructure, and unauthorized<br />
attempts to gain access to our company sensitive information, as do our customers, suppliers, subcontractors and venture<br />
partners. We may experience similar security threats at customer sites that we operate and manage as a contractual<br />
requirement.<br />
Prior cyberattacks directed at us have not had a material impact on our financial results and we believe our threat<br />
detection and mitigation processes and procedures are adequate. The threats we face vary from attacks common to most<br />
industries to more advanced and persistent, highly organized adversaries who target us because we protect national security<br />
information. If we are unable to protect sensitive information, our customers or governmental authorities could question the<br />
adequacy of our threat mitigation and detection processes and procedures. Due to the evolving nature of these security<br />
threats, the impact of any future incident cannot be predicted.<br />
Although we work cooperatively with our customers, suppliers, subcontractors, venture partners and acquisitions to seek<br />
to minimize the impact of cyber threats, other security threats, or business disruptions, we must rely on the safeguards put in<br />
place by these entities, which may affect the security of our information. These entities have varying levels of cybersecurity<br />
expertise and safeguards, and their relationships with government contractors, such as Lockheed Martin, may increase the<br />
likelihood that they are targeted by the same cyber threats we face.<br />
On July 9, 2015, the U.S. Office of Personnel Management (OPM) announced that the background investigation records<br />
of 21.5 million current, former and prospective Federal employees and contractors had been compromised as a result of a<br />
cyber-security incident. Many of our current as well as former employees were the subjects of background investigations in<br />
connection with former government service or as part of the screening process for a security clearance. We are currently<br />
assessing the impact of this cyber-security incident but do not yet know the impact, if any, on Lockheed Martin or our current<br />
or former employees.<br />
The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other<br />
means. Additionally, some cyber technologies we develop under contract for our customers, particularly those related to<br />
homeland security, may raise potential liabilities related to intellectual property and civil liberties, including privacy<br />
concerns, which may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely<br />
affect our internal operations, the services we provide to our customers, our future financial results, our reputation, or our<br />
stock price. Additionally, such events could result in the loss of competitive advantages derived from our research and<br />
development efforts or other intellectual property; early obsolescence of our products and services; or contractual penalties.<br />
If we fail to manage acquisitions, divestitures, equity investments and other transactions successfully or if acquired<br />
entities or equity investments fail to perform as expected, our financial results, business and future prospects could be<br />
harmed.<br />
In pursuing our business strategy, we routinely conduct discussions, evaluate companies, and enter into agreements<br />
regarding possible acquisitions, divestitures, ventures and equity investments. We seek to identify acquisition or investment<br />
opportunities that will expand or complement our existing products and services or customer base, at attractive valuations.<br />
We often compete with others for the same opportunities. To be successful, we must conduct due diligence to identify<br />
valuation issues and potential loss contingencies; negotiate transaction terms; complete and close complex transactions;<br />
integrate acquired companies and employees; and realize anticipated operating synergies efficiently and effectively.<br />
Acquisition, divestiture, venture and investment transactions often require substantial management resources and have the<br />
potential to divert our attention from our existing business. Unidentified pre-closing liabilities could affect our future<br />
financial results, particularly successor liability under procurement laws and regulations such as the False Claims Act or<br />
Truth in Negotiations Act, anti-corruption, tax, import-export and technology transfer laws which provide for civil and<br />
criminal penalties and the potential for debarment. We also may incur unanticipated costs or expenses, including post-closing<br />
asset impairment charges, expenses associated with eliminating duplicate facilities, employee retention, transaction-related or<br />
other litigation, and other liabilities. Any of the foregoing could adversely affect our business and results of operations.<br />
Ventures, or non-controlling equity investments, operate under shared control with other parties. Under the equity<br />
method of accounting for nonconsolidated ventures and investments, we recognize our share of the operating profit of these<br />
ventures in our results of operations. Our operating results may be affected by the performance of businesses over which we<br />
do not exercise control and which face many of the same risks and uncertainties as we do. The most significant impact of our<br />
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equity investments is in our Space Systems business segment where approximately 21% of its 2015 operating profit was<br />
derived from its share of earnings from equity method investees, particularly that in United Launch Alliance (ULA).<br />
Our ULA investment may be negatively impacted by restrictions in the National Defense Authorization Act for Fiscal<br />
Year 2015 that prevent the award or renewal of contracts after December 29, 2014 for evolved expendable launch vehicle<br />
services that utilize a rocket engine designed or manufactured in the Russian Federation such as the RD-180 engine used by<br />
the Atlas V launch vehicle. The Consolidated Appropriations Act of 2016 lifts these restrictions for fiscal year 2016.<br />
Accordingly, Lockheed Martin does not anticipate an impact on the carrying value of its equity investment in ULA in 2016.<br />
If restrictions are re-imposed for fiscal year 2016, as some in Congress advocate, or the lifting of the restrictions is not<br />
extended to later fiscal years, or if sanctioned individuals are found to be too closely connected to the engine manufacturer,<br />
ULA will be challenged to compete effectively for national security launch procurements which could negatively impact<br />
ULA and the carrying value of our investment in ULA. ULA continues to evaluate domestic engine alternatives and we will<br />
continue to monitor the carrying value of our investment.<br />
The acquired Sikorsky business may underperform relative to our expectations, the transaction may cause our<br />
financial results to differ from our expectations or the expectations of the investment community and we may not be<br />
able to achieve anticipated cost savings or other anticipated synergies.<br />
On November 6, 2015, we completed the acquisition of Sikorsky Aircraft Corporation (Sikorsky) by purchasing all of<br />
the issued and outstanding equity of Sikorsky for $9.0 billion, net of cash acquired. We believe that we will benefit from the<br />
integration of our products and technologies with those of the Sikorsky business and realize synergies and potential for longterm<br />
growth, as well as expanded capabilities and customer relationships as a result of the acquisition. However, the<br />
integration process is complex, costly and time-consuming and we may not be able to capture anticipated synergies, tax<br />
benefits, cost savings, and business opportunities in the time frame anticipated, or at all. Sikorsky also may not perform as<br />
expected, or demand for its products may be adversely affected by global economic conditions, including oil and gas trends<br />
that are outside of its control. The acquisition could also cause disruptions in our and Sikorsky’s business, including potential<br />
adverse reactions or changes to business relationships and competitive responses. The DoD has expressed concerns regarding<br />
greater consolidation in the defense industry at the prime contractor level in the context of our acquisition of Sikorsky and<br />
indicated the potential that they will seek to work with Congress to explore additional legal tools and policy to preserve<br />
diversity at the prime contract level. Changes in DoD policy or perception of our size could have adverse impacts on our<br />
business, including our success in future contract pursuits. Any of the foregoing could adversely affect our business, financial<br />
condition and results of operations.<br />
We are pursuing a plan to separate and combine our government information technology and technical services<br />
businesses with Leidos, Holdings, Inc. in a tax-efficient Reverse Morris Trust transaction. The proposed transaction<br />
may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits.<br />
On January 26, 2016, we entered into definitive agreements to separate and combine our Information Systems & Global<br />
Solutions (IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a tax-efficient Reverse Morris Trust transaction.<br />
As part of the transaction, we will receive a $1.8 billion one-time special cash payment. The cash payment is subject to<br />
adjustment and could be less or more than anticipated due to variances in working capital. Additionally, our stockholders will<br />
receive approximately 50.5 percent of the outstanding equity of Leidos on a fully diluted basis (approximately 77 million<br />
shares) with an estimated value of $3.2 billion based on Leidos’ stock price on the date of announcement. However, the<br />
actual value of the stock to be received by our stockholders will depend on the value of such shares at the time of closing of<br />
the transaction and our stockholders may receive more or less than the anticipated value. At our election, the distribution may<br />
be effected by means of a pro rata dividend in a spin-off transaction or in an exchange offer for outstanding Lockheed Martin<br />
shares in a split-off transaction. The transaction structure, which is subject to market conditions, is currently contemplated to<br />
be a split-off transaction resulting in a decrease in our outstanding common shares and a significant book gain at closing. In a<br />
split-off transaction, only those stockholders that elect to participate will receive Leidos shares in the merger transaction,<br />
provided, that, if the exchange offer is not fully subscribed, Lockheed Martin will spin-off the remaining shares to be<br />
converted into Leidos stock in the merger pro rata. The value of the shares of Leidos stock to be received and the value of our<br />
stock at the time of the split-off will also impact the number of any shares of our stock retired in the split-off and the amount<br />
of any book gain. Although the transaction structure is currently contemplated to be a split-off transaction, there is no<br />
assurance that the transaction will be structured as a split-off transaction or that it will result in a reduction in our shares or a<br />
gain at closing.<br />
There can be no assurance of the timing of a transaction with Leidos, or whether any such transaction will take place at<br />
all. The transaction is subject to closing conditions, including the receipt of approval of Leidos stockholders, regulatory<br />
approvals and receipt of opinions of tax counsel, and there can be no assurance that we will receive the required approvals in<br />
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a timely manner or at all, or that such approvals will not contain adverse conditions. We also have no assurance that we will<br />
be able to realize the intended benefits and tax treatment of the transaction or that the new combined company will perform<br />
as expected. The announcement and pendency of the transaction could also cause disruptions in our and Leidos’ business,<br />
including potential adverse reactions or changes to business relationships and competitive responses to the transaction. The<br />
transaction will also require significant amounts of time and effort which could divert management’s attention from<br />
operating and growing our business. Any of the foregoing could adversely affect our business, financial condition and results<br />
of operations. Declines in our sales, earnings and cash flows could also result in future asset impairments (including<br />
goodwill). Additionally, the former IS&GS programs we moved to our other business segments and retained could<br />
experience increased pricing pressures which could have a negative impact on operating margins and impact our ability to<br />
win future renewals.<br />
In addition, as part of the transaction with Leidos, it is contemplated that immediately prior to the transaction, the<br />
IS&GS business would enter into third-party financing in an aggregate principal amount of approximately $1.8 billion to<br />
finance the $1.8 billion special cash payment and the payment of certain fees and expenses. The IS&GS business (through a<br />
subsidiary created for the transaction) has entered into a commitment letter (the “Commitment Letter”) with certain financial<br />
institutions to provide this financing through $710 million of Term Loan A facilities and a $1.13 billion Term Loan B<br />
facility. Under the terms of the Commitment Letter, if the closing does not occur by July 26, 2016, the lenders (in<br />
consultation with us) could require the IS&GS business subsidiary to borrow up to the full amount of the Term Loan B<br />
facility in advance of the closing of the transaction (the “Loan Demand”) and deposit the proceeds of such borrowing in<br />
escrow to secure such loan, which would increase our total outstanding debt for the period from the date the Loan Demand is<br />
exercised until closing of the transaction. If the closing of the transaction were not to occur and our agreement with Leidos<br />
was terminated, we would cause the IS&GS business to repay any amounts borrowed and would be entitled to<br />
reimbursement for financing costs from Leidos under the term of our agreement with Leidos.<br />
Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.<br />
A significant portion of our business relates to designing, developing and manufacturing advanced defense and<br />
technology products and systems. New technologies may be untested or unproven. Failure of some of these products and<br />
services could result in extensive loss of life or property damage. Accordingly, we also may incur liabilities that are unique to<br />
our products and services, including combat and air mobility aircraft, missile and space systems, command and control<br />
systems, air traffic control management systems, cybersecurity, homeland security and training programs. In some but not all<br />
circumstances, we may be entitled to certain legal protections or indemnifications from our customers, either through U.S.<br />
Government indemnifications under Public Law 85-804 or the Price-Anderson Act, qualification of our products and services<br />
by the Department of Homeland Security under the SAFETY Act provisions of the Homeland Security Act of 2002,<br />
contractual provisions or otherwise. We endeavor to obtain insurance coverage from established insurance carriers to cover<br />
these risks and liabilities. The amount of insurance coverage that we maintain may not be adequate to cover all claims or<br />
liabilities. Existing coverage may be cancelled while we remain exposed to the risk, and it is not possible to obtain insurance<br />
to protect against all operational risks and liabilities. For example, we are limited in the amount of insurance we can obtain to<br />
cover certain natural hazards, such as earthquakes. We have significant operations in geographic areas prone to this risk, such<br />
as Sunnyvale, California. Even if insurance coverage is available, we may not be able to obtain it at a price or on terms<br />
acceptable to us. Additionally, disputes with insurance carriers over coverage terms or the insolvency of one or more of our<br />
insurance carriers may significantly affect the amount or timing of our cash flows.<br />
Substantial costs resulting from an accident; failure of or defect in our products or services; natural catastrophe or other<br />
incident; or liability arising from our products and services in excess of any legal protection, indemnity, and our insurance<br />
coverage (or for which indemnity or insurance is not available or not obtained) could adversely impact our financial<br />
condition, cash flows, or operating results. Any accident, failure of, or defect in our products or services, even if fully<br />
indemnified or insured, could negatively affect our reputation among our customers and the public and make it more difficult<br />
for us to compete effectively. It also could affect the cost and availability of adequate insurance in the future.<br />
Pension funding and costs are dependent on several economic assumptions which if changed may cause our future<br />
earnings and cash flow to fluctuate significantly as well as affect the affordability of our products and services.<br />
Many of our employees are covered by defined benefit pension plans, and we provide certain health care and life<br />
insurance benefits to eligible retirees. The impact of these plans on our U.S. generally accepted accounting principles<br />
(GAAP) earnings may be volatile in that the amount of expense we record for our postretirement benefit plans may<br />
materially change from year to year because those calculations are sensitive to funding levels as well as changes in several<br />
key economic assumptions, including interest rates, rates of return on plan assets, and other actuarial assumptions including<br />
participant longevity (also known as mortality), employee turnover, as well as the timing of cash funding. Changes in these<br />
18
factors, including actual returns on plan assets, may also affect our plan funding, cash flow and stockholders’ equity. In<br />
addition, the funding of our plans and recovery of costs on our contracts, as described below, also may be subject to changes<br />
caused by legislative or regulatory actions. We have taken certain actions over the last few years to mitigate the volatility the<br />
plans may have on our cash flows and earnings, including amendments made in June 2014 to certain of our qualified and<br />
nonqualified defined benefit pension plans for non-union employees to freeze future retirement benefits. However, the<br />
impact of these actions on our cash flow and earnings may be less than anticipated or may be offset by other factors such as<br />
changes in actuarial assumptions and plan asset investment returns.<br />
With regard to cash flow, we have made substantial cash contributions to our plans in excess of the amounts required by<br />
the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA).<br />
We generally are able to recover these contributions related to our plans as allowable costs on our U.S. Government<br />
contracts, including FMS, but there is a lag between when we contribute cash to our plans under pension funding rules and<br />
recover it under U.S. Government Cost Accounting Standards (CAS). Effective February 2012, the CAS rules were revised<br />
to harmonize the measurement and period assignment of the pension cost allocable to government contracts with the PPA<br />
(CAS Harmonization). In 2013, the cost impact of CAS Harmonization started being phased in with the goal of better<br />
aligning the CAS pension cost and ERISA funding requirements being fully achieved in 2017. The enactment of the<br />
Highway and Transportation Funding Act of 2014 and Bipartisan Budget Act of 2015 increased the interest rate assumption<br />
used to determine our CAS pension costs, which has the effect of lowering the recovery of pension contributions during the<br />
affected periods as it decreases our CAS pension costs.<br />
For more information on how these factors could impact earnings, financial position, cash flow and stockholders’ equity,<br />
see “Critical Accounting Policies – Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial<br />
Conditions and Results of Operations and “Note 11 – Postretirement Plans” of our consolidated financial statements.<br />
Environmental costs could affect our future earnings as well as the affordability of our products and services.<br />
Our operations are subject to and affected by a variety of federal, state, local and foreign environmental protection laws<br />
and regulations. We are involved in environmental responses at some of our facilities, former facilities, and at third-party<br />
sites not owned by us where we have been designated a potentially responsible party. In addition, we could be affected by<br />
future regulations imposed or claims asserted in response to concerns over climate change, other aspects of the environment<br />
or natural resources. We have an ongoing comprehensive sustainability program to reduce the effects of our operations on the<br />
environment.<br />
We manage various government-owned facilities on behalf of the government. At such facilities, environmental<br />
compliance and remediation costs historically have been the responsibility of the government, and we have relied, and<br />
continue to rely with respect to past practices, upon government funding to pay such costs. Although the government remains<br />
responsible for capital and operating costs associated with environmental compliance, responsibility for fines and penalties<br />
associated with environmental noncompliance typically is borne by either the government or the contractor, depending on the<br />
contract and the relevant facts. Some environmental laws include criminal provisions. An environmental law conviction<br />
could affect our ability to be awarded future, or perform existing, U.S. Government contracts.<br />
We have incurred and will continue to incur liabilities under various federal, state, local and foreign statutes for<br />
environmental protection and remediation. The extent of our financial exposure cannot in all cases be reasonably estimated at<br />
this time. Among the variables management must assess in evaluating costs associated with these cases and remediation sites<br />
generally are the status of site assessment, extent of the contamination, impacts on natural resources, changing cost estimates,<br />
evolution of technologies used to remediate the site, and continually evolving governmental environmental standards and<br />
cost allowability issues. For information regarding these matters, including current estimates of the amounts that we believe<br />
are required for remediation or cleanup to the extent probable and estimable, see “Critical Accounting Policies –<br />
Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and<br />
“Note 14 – Legal Proceedings, Commitments and Contingencies” of our consolidated financial statements.<br />
We are involved in a number of legal proceedings. We cannot predict the outcome of litigation and other<br />
contingencies with certainty.<br />
Our business may be adversely affected by the outcome of legal proceedings and other contingencies that cannot be<br />
predicted with certainty. As required by GAAP, we estimate loss contingencies and establish reserves based on our<br />
assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and<br />
circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our<br />
19
assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial<br />
statements. For a description of our current legal proceedings, see Item 3 – Legal Proceedings and “Note 14 – Legal<br />
Proceedings, Commitments and Contingencies” of our consolidated financial statements.<br />
Our success depends, in part, on our ability to maintain a qualified workforce.<br />
Due to the specialized nature of our business, our future performance is highly dependent upon our ability to maintain a<br />
workforce with the requisite skills in multiple areas including: engineering, science, manufacturing, information technology,<br />
cybersecurity, business development and strategy and management. Our operating performance is also dependent upon<br />
personnel who hold security clearances and receive substantial training in order to work on certain programs or tasks.<br />
Additionally, as we expand our operations internationally, it will be increasingly important to hire and retain personnel with<br />
relevant experience in local laws, regulations, customs, traditions and business practices.<br />
We face a number of challenges that may affect personnel retention such as our endeavors to increase the efficiency of<br />
our operations and improve the affordability of our products and services such as workforce reductions and consolidating and<br />
relocating certain operations. Additionally, our workforce demographic continues to shift toward a higher proportion of<br />
employees nearing retirement. In June 2014, we amended certain of our defined benefit pension plans for non-union<br />
employees to freeze future retirement benefits, which may encourage retirement-eligible personnel to elect to retire earlier<br />
than anticipated.<br />
To the extent that we lose experienced personnel, it is critical that we develop other employees, hire new qualified<br />
personnel, and successfully manage the transfer of critical knowledge. Competition for personnel is intense, and we may not<br />
be successful in hiring or retaining personnel with the requisite skills or clearances. We increasingly compete with<br />
commercial technology companies outside of the aerospace and defense industry for qualified technical, cyber and scientific<br />
positions as the number of qualified domestic engineers is decreasing and the number of cyber professionals is not keeping<br />
up with demand. To the extent that these companies grow at a faster rate or face fewer cost and product pricing constraints,<br />
they may be able to offer more attractive compensation and other benefits to candidates or our existing employees. To the<br />
extent that the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting or training costs in<br />
order to attract and retain such employees; we could experience difficulty in performing our contracts if we were unable to<br />
do so. We also must manage leadership development and succession planning throughout our business. While we have<br />
processes in place for management transition and the transfer of knowledge, the loss of key personnel, coupled with an<br />
inability to adequately train other personnel, hire new personnel or transfer knowledge, could significantly impact our ability<br />
to perform under our contracts.<br />
Approximately 18% of our employees are covered by collective bargaining agreements with various unions.<br />
Historically, where employees are covered by collective bargaining agreements with various unions, we have been successful<br />
in negotiating renewals to expiring agreements without any material disruption of operating activities. This does not assure,<br />
however, that we will be successful in our efforts to negotiate renewals of our existing collective bargaining agreements in<br />
the future. If we encounter difficulties with renegotiations or renewals of collective bargaining arrangements or are<br />
unsuccessful in those efforts, we could incur additional costs and experience work stoppages. Union actions at suppliers can<br />
also affect us. Any delays or work stoppages could adversely affect our ability to perform under our contracts, which could<br />
negatively impact our results of operations, cash flows, and financial condition.<br />
Our estimates and projections may prove to be inaccurate.<br />
The accounting for some of our most significant activities is based on judgments and estimates, which are complex and<br />
subject to many variables. For example, accounting for sales using the percentage-of-completion method requires that we<br />
assess risks and make assumptions regarding schedule, cost, technical and performance issues for each of our thousands of<br />
contracts, many of which are long-term in nature. Additionally, we initially allocate the purchase price of acquired businesses<br />
based on a preliminary assessment of the fair value of identifiable assets acquired and liabilities assumed. The size and<br />
breadth of significant acquisitions, such as Sikorsky, necessitate the use of a one year measurement period to adequately<br />
analyze and assess a number of factors used in establishing the asset and liability fair values as of the acquisition date and<br />
could result in adjustments to asset and liability balances, including changes in fair values of contracts assumed, fixed assets,<br />
inventories and deferred revenue and changes in fair values of intangible assets and goodwill, as well as changes to the<br />
amortization periods assigned to these assets. Any potential adjustments made could be material in relation to the preliminary<br />
purchase price allocations recorded on acquisition dates. Another example is the $13.6 billion of goodwill assets recorded on<br />
our Balance Sheet as of December 31, 2015 from previous acquisitions which represent greater than 27% of our total assets.<br />
These goodwill assets are subject to annual impairment testing and more frequent testing upon the occurrence of certain<br />
20
events or significant changes in circumstances that indicate goodwill may be impaired. If we experience changes or factors<br />
arise that negatively affect the expected cash flows of a reporting unit, we may be required to write off all or a portion of the<br />
reporting unit’s related goodwill assets.<br />
Changes in U.S. or foreign tax laws, including those with retroactive effect, and audits by tax authorities could result in<br />
unanticipated increases in our tax expense and affect profitability and cash flows. For example, proposals to lower the U.S.<br />
corporate income tax rate would require us to reduce our net deferred tax assets upon enactment of the related tax legislation,<br />
with a corresponding material, one-time increase to income tax expense; however, our income tax expense and payments<br />
would be materially reduced in subsequent years.<br />
Actual financial results could differ from our judgments and estimates. Refer to “Critical Accounting Policies” in<br />
Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 1 – Significant<br />
Accounting Policies” of our consolidated financial statements for a complete discussion of our significant accounting<br />
policies and use of estimates.<br />
ITEM 1B.<br />
Unresolved Staff Comments.<br />
None.<br />
ITEM 2.<br />
Properties.<br />
At December 31, 2015, we owned or leased building space (including offices, manufacturing plants, warehouses, service<br />
centers, laboratories and other facilities) at approximately 591 locations primarily in the U.S. Additionally, we manage or<br />
occupy various U.S. Government-owned facilities under lease and other arrangements.<br />
At December 31, 2015, we had significant operations in the following locations:<br />
• Aeronautics – Palmdale, California; Marietta, Georgia; Greenville, South Carolina; Fort Worth and San Antonio, Texas;<br />
and Montreal, Canada.<br />
• Information Systems & Global Solutions – Gaithersburg, Maryland.<br />
• Missiles and Fire Control – Camden, Arkansas; Orlando, Florida; and Grand Prairie, Texas.<br />
• Mission Systems and Training – Stratford and Shelton, Connecticut; Colorado Springs, Colorado; Orlando and Jupiter,<br />
Florida; Baltimore, Maryland; Moorestown/Mt. Laurel, New Jersey; Owego and Syracuse, New York; Coatesville,<br />
Pennsylvania; Akron, Ohio; Manassas, Virginia; and Mielec, Poland.<br />
• Space Systems – Huntsville, Alabama; Sunnyvale, California; Denver, Colorado; Albuquerque, New Mexico; and Valley<br />
Forge, Pennsylvania.<br />
• Corporate activities – Lakeland, Florida; and Bethesda, Maryland.<br />
In connection with the acquisition of Sikorsky Aircraft Corporation, we assumed 6.5 million square feet of building<br />
space. However, as a result of our ongoing consolidation efforts we reduced our overall floor space by 2.1 million square feet<br />
at our previously owned heritage properties in 2015.<br />
The following is a summary of our square feet of floor space by business segment at December 31, 2015 (in millions):<br />
Owned Leased<br />
U.S. Government-<br />
Owned Total<br />
Aeronautics 5.8 2.5 14.2 22.5<br />
Information Systems & Global Solutions 0.5 3.2 — 3.7<br />
Missiles and Fire Control 4.2 4.3 1.8 10.3<br />
Mission Systems and Training 10.9 8.3 0.4 19.6<br />
Space Systems 8.5 2.6 7.8 18.9<br />
Corporate activities 3.0 1.0 — 4.0<br />
Total 32.9 21.9 24.2 79.0<br />
We believe our facilities are in good condition and adequate for their current use. We may improve, replace or reduce<br />
facilities as considered appropriate to meet the needs of our operations.<br />
21
ITEM 3. Legal Proceedings.<br />
We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our<br />
business, including matters arising under provisions relating to the protection of the environment, and are subject to<br />
contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties,<br />
compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome<br />
of these matters will have a material adverse effect on the Corporation as a whole, notwithstanding that the unfavorable<br />
resolution of any matter may have a material effect on our net earnings in any particular interim reporting period. We cannot<br />
predict the outcome of legal or other proceedings with certainty. These matters include the proceedings summarized in<br />
“Note 14 – Legal Proceedings, Commitments and Contingencies” of our consolidated financial statements.<br />
We are subject to federal, state, local and foreign requirements for protection of the environment, including those for<br />
discharge of hazardous materials and remediation of contaminated sites. As a result, we are a party to or have property<br />
subject to various lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and<br />
pervasiveness, such requirements have resulted in us being involved with related legal proceedings, claims and remediation<br />
obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information<br />
regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up<br />
to the extent estimable, see “Critical Accounting Policies – Environmental Matters” in Management’s Discussion and<br />
Analysis of Financial Condition and Results of Operations and “Note 14 – Legal Proceedings, Commitments and<br />
Contingencies” of our consolidated financial statements.<br />
On October 26, 2015, the New Mexico Environmental Department (NMED) issued a Notice of Violation (NOV) related to a<br />
hazardous waste compliance evaluation that NMED conducted at Sandia National Laboratories in April 2015. Sandia Corporation<br />
manages Sandia National Laboratories on behalf of the Department of Energy. The NOV sets forth several violations of New<br />
Mexico’s Hazardous Waste Regulations generally related to alleged failures to: make hazardous waste determinations, determine if<br />
waste meets land disposal standards, prepare proper manifests, properly train personnel, complete inspection forms, maintain<br />
inspection records, properly label waste and comply with time-based waste storage limits. Unlawful disposal of waste as a result of<br />
the foregoing was also alleged. NMED proposed a civil penalty of approximately $151,000 which Sandia Corporation paid. We do<br />
not currently believe that it is probable that we will incur a material loss related to this matter.<br />
We have reached an agreement to settle with the U.S. Department of Justice (DOJ) and the qui tam relators two previously<br />
disclosed lawsuits in which the DOJ filed complaints in partial intervention on August 28, 2003. The lawsuits, United States ex<br />
rel. Natural Resources Defense Council, et al., v. Lockheed Martin Corporation, et al., and United States ex rel. John D. Tillson<br />
v. Lockheed Martin Energy Systems, Inc., et al., were filed by the relators in 1999 under the civil qui tam provisions of the False<br />
Claims Act in the U.S. District Court for the Western District of Kentucky and alleged that we committed violations of the<br />
Resource Conservation and Recovery Act (RCRA) at the Paducah Gaseous Diffusion Plant by not properly handling, storing<br />
and transporting hazardous waste and that we violated the False Claims Act by misleading Department of Energy officials and<br />
state regulators about the nature and extent of environmental noncompliance at the plant. The parties are finalizing the terms of<br />
the settlement agreement, which is considered a tentative agreement until it is formally approved by the United States<br />
Government. Under the terms of our agreement, we will pay $5 million, of which $4 million will be allocated to all Defendants,<br />
including the Corporation and its predecessor, Martin Marietta Corporation; wholly-owned subsidiary Lockheed Martin Energy<br />
Systems, Inc. and its predecessor, Martin Marietta Energy Systems, Inc.; and wholly-owned subsidiary Lockheed Martin Utility<br />
Services, Inc. and its predecessor Martin Marietta Utility Services, Inc. and the False Claims Act allegations; $500,000 will be<br />
allocated to Lockheed Martin Energy Systems, Inc. and RCRA civil penalties; and $500,000 will be allocated to Lockheed<br />
Martin Utility Services, Inc. and RCRA civil penalties. We believe that we have substantial defenses to all of the allegations and<br />
have agreed to settle the case to avoid the costs of further litigation of this matter which has been ongoing in excess of sixteen<br />
years. We will admit no liability or wrongdoing in resolving the matter.<br />
As a U.S. Government contractor, we are subject to various audits and investigations by the U.S. Government to<br />
determine whether our operations are being conducted in accordance with applicable regulatory requirements. U.S.<br />
Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in<br />
administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension,<br />
proposed debarment, debarment from eligibility for future U.S. Government contracting, or suspension of export privileges.<br />
Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S.<br />
Government. U.S. Government investigations often take years to complete and many result in no adverse action against us.<br />
We also provide products and services to customers outside of the U.S., which are subject to U.S. and foreign laws and<br />
regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S.<br />
Government regulations also may be audited or investigated.<br />
ITEM 4. Mine Safety Disclosures.<br />
Not applicable.<br />
22
ITEM 4(a). Executive Officers of the Registrant.<br />
Our executive officers as of February 24, 2016 are listed below, with their ages on that date, positions and offices<br />
currently held, and principal occupation and business experience during at least the last five years. There were no family<br />
relationships among any of our executive officers and directors. All officers serve at the discretion of the Board of Directors.<br />
Richard F. Ambrose (age 57), Executive Vice President – Space Systems<br />
Mr. Ambrose has served as Executive Vice President of Space Systems since April 2013. He previously served as Vice<br />
President and Deputy, Space Systems from July 2012 to March 2013; President, Information Systems & Global Solutions –<br />
Security from January 2011 to June 2012; and Vice President and General Manager, Space Systems – Surveillance and<br />
Navigations Systems from January 2008 to December 2010.<br />
Sondra L. Barbour (age 53), Executive Vice President – Information Systems & Global Solutions<br />
Ms. Barbour has served as Executive Vice President of Information Systems & Global Solutions since April 2013. She<br />
previously served as Senior Vice President and Chief Information Officer from January 2012 to March 2013, and Vice<br />
President and Chief Information Officer from February 2008 to January 2012.<br />
Dale P. Bennett (age 59), Executive Vice President – Mission Systems and Training<br />
Mr. Bennett has served as Executive Vice President of Mission Systems and Training since December 2012. He<br />
previously served as President, Mission Systems & Sensors from August 2011 to December 2012; President, Global Training<br />
and Logistics from June 2010 to July 2011; and President, Simulation, Training & Support from July 2005 to May 2010.<br />
Orlando P. Carvalho (age 57), Executive Vice President – Aeronautics<br />
Mr. Carvalho has served as Executive Vice President of Aeronautics since March 2013. He previously served as<br />
Executive Vice President and General Manager, F-35 Program from March 2012 to March 2013; Vice President and Deputy,<br />
F-35 Program from August 2011 to March 2012; President, Mission Systems & Sensors from January 2010 to July 2011; and<br />
Vice President and General Manager, Surface Systems Ballistic Missile Defense Programs from January 2006 to January<br />
2010.<br />
Brian P. Colan (age 55), Vice President, Controller, and Chief Accounting Officer<br />
Mr. Colan has served as Vice President, Controller, and Chief Accounting Officer since August 2014. He previously<br />
served as Vice President and Controller, Missiles and Fire Control from January 2013 to August 2014; and Vice President<br />
and Controller, Electronic Systems from October 2011 to January 2013. He was previously employed by British Aerospace<br />
Systems from January 2005 to September 2011, most recently as Vice President, Finance, Land Armaments Operation<br />
Group.<br />
Richard H. Edwards (age 59), Executive Vice President – Missiles and Fire Control<br />
Mr. Edwards has served as Executive Vice President of Missiles and Fire Control since December 2012. He previously<br />
served as Executive Vice President, Program and Technology Integration, Missiles and Fire Control from June 2012 to<br />
December 2012; and Vice President, Tactical Missiles and Combat Maneuver Systems from July 2005 to June 2012.<br />
Marillyn A. Hewson (age 62), Chairman, President and Chief Executive Officer<br />
Ms. Hewson has served as Chairman, President and Chief Executive Officer of Lockheed Martin since January 2014.<br />
Having served 33 years at Lockheed Martin in roles of increasing responsibility, she held the positions of Chief Executive<br />
Officer and President from January 2013 to December 2013; President and Chief Operating Officer from November 2012 to<br />
December 2012; Executive Vice President – Electronic Systems from January 2010 to November 2012; and President,<br />
Systems Integration – Owego from September 2008 to December 2009.<br />
23
Maryanne R. Lavan (age 56), Senior Vice President, General Counsel and Corporate Secretary<br />
Ms. Lavan has served as Senior Vice President and General Counsel since June 2010 and Corporate Secretary since<br />
September 2010. She previously served as Vice President, Internal Audit from February 2007 to June 2010.<br />
Kenneth R. Possenriede (age 56), Vice President and Treasurer<br />
Mr. Possenriede has served as Vice President and Treasurer since July 2011. He previously served as Vice President,<br />
Finance and Business Operations of Electronic Systems from July 2008 to June 2011.<br />
Bruce L. Tanner (age 56), Executive Vice President and Chief Financial Officer<br />
Mr. Tanner has served as Executive Vice President and Chief Financial Officer since September 2007.<br />
24
PART II<br />
ITEM 5.<br />
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity<br />
Securities.<br />
At January 29, 2016, we had 29,972 holders of record of our common stock, par value $1 per share. Our common stock<br />
is traded on the New York Stock Exchange (NYSE) under the symbol LMT. Information concerning the stock prices based<br />
on intra-day trading prices as reported on the NYSE composite transaction tape and dividends paid during the past two years<br />
is as follows:<br />
Common Stock – Dividends Paid Per Share and Market Prices<br />
Dividends Paid Per Share Stock Prices (High-Low)<br />
Quarter 2015 2014 2015 2014<br />
First $1.50 $1.33 $207.06 - $186.01 $168.41 - $144.69<br />
Second 1.50 1.33 206.19 - 185.65 168.87 - 153.54<br />
Third 1.50 1.33 213.34 - 181.91 182.27 - 156.23<br />
Fourth 1.65 1.50 227.91 - 199.01 198.72 - 166.28<br />
Year $6.15 $5.49 $227.91 - $181.91 $198.72 - $144.69<br />
Stockholder Return Performance Graph<br />
The following graph compares the total return on a cumulative basis of $100 invested in Lockheed Martin common<br />
stock on December 31, 2010 to the Standard and Poor’s (S&P) 500 Index and the S&P Aerospace & Defense (S&P Aero)<br />
Index.<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
-<br />
Lockheed Martin Common Stock<br />
S&P Aerospace & Defense Index<br />
S&P 500 Index<br />
The S&P Aero Index comprises General Dynamics Corporation, Honeywell International Inc., L3 Communications<br />
Holdings Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Precision Cast Parts Corporation, Raytheon<br />
Company, Rockwell Collins, Inc., Textron Inc., The Boeing Company, and United Technologies Corporation. The<br />
stockholder return performance indicated on the graph is not a guarantee of future performance.<br />
This graph is not deemed to be “filed” with the U.S. Securities and Exchange Commission or subject to the liabilities of<br />
Section 18 of the Securities Exchange Act of 1934 (the Exchange Act), and should not be deemed to be incorporated by<br />
reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act.<br />
25
Purchases of Equity Securities<br />
The following table provides information about our repurchases of our common stock registered pursuant to Section 12<br />
of the Securities Exchange Act of 1934 during the quarter ended December 31, 2015.<br />
Period (a)<br />
Total<br />
Number of<br />
Shares<br />
Purchased<br />
Average<br />
Price Paid<br />
Per Share<br />
Total Number of<br />
Shares Purchased<br />
as Part of Publicly<br />
Announced Plans or<br />
Programs (b)<br />
Amount<br />
Available for<br />
Future Share<br />
Repurchases<br />
Under the<br />
Plans or<br />
Programs (b)<br />
(in millions)<br />
September 28, 2015 – October 25, 2015 754,286 $208.57 754,004 $4,150<br />
October 26, 2015 – November 29, 2015 1,300,340 $218.87 1,300,071 $3,866<br />
November 30, 2015 – December 31, 2015 1,231,351 $217.27 1,221,812 $3,600<br />
Total 3,285,977 (c) $215.90 3,275,887 $3,600<br />
(a)<br />
(b)<br />
(c)<br />
We close our books and records on the last Sunday of each month to align our financial closing with our business processes, except<br />
for the month of December, as our fiscal year ends on December 31. As a result, our fiscal months often differ from the calendar<br />
months. For example, September 28, 2015 was the first day of our October 2015 fiscal month.<br />
In October 2010, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase<br />
our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current<br />
market prices. On September 24, 2015, our Board of Directors authorized a $3.0 billion increase to the program. Under the program,<br />
management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in<br />
compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 plans. The program does not have<br />
an expiration date.<br />
During the quarter ended December 31, 2015, the total number of shares purchased included 10,090 shares that were transferred to<br />
us by employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units. These<br />
purchases were made pursuant to a separate authorization by our Board of Directors and are not included within the program.<br />
26
ITEM 6.<br />
Selected Financial Data.<br />
(In millions, except per share data) 2015 2014 2013 2012 2011<br />
Operating results<br />
Net sales $46,132 $45,600 $45,358 $47,182 $46,499<br />
Operating profit (a)(b) 5,436 5,592 4,505 4,434 4,020<br />
Net earnings from continuing operations (a)(b) 3,605 3,614 2,950 2,745 2,667<br />
Net earnings (a)(b) 3,605 3,614 2,981 2,745 2,655<br />
Net earnings from continuing operations per common share<br />
Basic (a)(b) 11.62 11.41 9.19 8.48 7.94<br />
Diluted (a)(b) 11.46 11.21 9.04 8.36 7.85<br />
Net earnings per common share<br />
Basic (a)(b) 11.62 11.41 9.29 8.48 7.90<br />
Diluted (a)(b) 11.46 11.21 9.13 8.36 7.81<br />
Cash dividends declared per common share $ 6.15 $ 5.49 $ 4.78 $ 4.15 $ 3.25<br />
Balance sheet (c)<br />
Cash, cash equivalents and short-term investments (b) $ 1,090 $ 1,446 $ 2,617 $ 1,898 $ 3,582<br />
Total current assets 16,198 12,322 13,329 13,855 14,094<br />
Goodwill (d) 13,576 10,862 10,348 10,370 10,148<br />
Total assets (b)(d) 49,128 37,046 36,163 38,629 37,878<br />
Total current liabilities 14,057 11,112 11,120 12,155 12,130<br />
Total debt, net (e) 15,261 6,142 6,127 6,280 6,430<br />
Total liabilities (b)(e) 46,031 33,646 31,245 38,590 36,877<br />
Stockholders’ equity (b) 3,097 3,400 4,918 39 1,001<br />
Common shares in stockholders’ equity at year-end 303 314 319 321 321<br />
Cash flow information<br />
Net cash provided by operating activities (b)(f) $ 5,101 $ 3,866 $ 4,546 $ 1,561 $ 4,253<br />
Net cash used for investing activities (g) (9,734) (1,723) (1,121) (1,177) (788)<br />
Net cash provided by (used for) financing activities (h) 4,277 (3,314) (2,706) (2,068) (2,144)<br />
Backlog (i) $99,600 $80,547 $82,600 $82,300 $80,700<br />
(a)<br />
(b)<br />
(c)<br />
(d)<br />
(e)<br />
(f)<br />
(g)<br />
(h)<br />
(i)<br />
Our operating profit, earnings and earnings per share were affected by severance charges of $102 million ($66 million or $.21 per<br />
share, after tax) in 2015 (Note 15); severance charges of $201 million ($130 million or $.40 per share, after tax) in 2013 (Note 15);<br />
and severance charges of $136 million ($88 million or $.26 per share, after tax) in 2011; a non-cash goodwill impairment charge of<br />
$119 million ($107 million or $.33 per share, after tax) in 2014 (Note 1); and a non-cash goodwill impairment charge of<br />
$195 million ($176 million or $.54 per share, after tax) in 2013 (Note 1).<br />
The impact of our postretirement benefit plans can cause our operating profit, net earnings, cash flows and amounts recorded on our<br />
Balance Sheets to fluctuate. Accordingly, our earnings were affected by FAS/CAS pension income of $471 million and $376 million<br />
in 2015 and 2014 and expense of $482 million, $830 million, and $922 million in 2013, 2012, and 2011. We had $5 million in<br />
pension contributions in 2015 (for Sikorsky plans), as compared to $2.0 billion in 2014, $2.25 billion in 2013, $3.6 billion in 2012<br />
and $2.3 billion in 2011, and these contributions caused fluctuations in our operating cash flows and cash balance between each of<br />
those years. Fluctuations in our total assets, total liabilities and stockholders’ equity between years from 2011 to 2014 primarily<br />
were due to the annual measurement of the funded status of our postretirement benefit plans. See “Critical Accounting Policies –<br />
Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more<br />
information.<br />
Certain prior period amounts have been reclassified to conform to current year presentation.<br />
The increase in our goodwill and total assets from 2014 to 2015 was primarily attributable to the Sikorsky acquisition, which<br />
resulted in an increase in goodwill and total assets of $2.8 billion and $11.7 billion, respectively.<br />
The increase in our total debt and total liabilities from 2014 to 2015 was primarily a result of the debt incurred to fund the Sikorsky<br />
acquisition, as well as the issuance of debt in February of 2015 for general corporate purposes (Note 3 and Note 10).<br />
The fluctuations in our net cash provided by operating activities between years from 2011 to 2015 were due to changes in pension<br />
contributions, working capital and tax payments made. See “Liquidity and Cash Flows” in Management’s Discussion and Analysis<br />
of Financial Condition and Results of Operations for more information.<br />
The increase in our cash used for investing activities in 2015 and 2014 was attributable to acquisitions of businesses, including the<br />
$9.0 billion acquisition of Sikorsky in 2015, net of cash acquired (Note 3).<br />
The increase in our cash provided by financing activities in 2015 was primarily a result of the debt incurred to fund the Sikorsky<br />
acquisition (Note 10). The increase in our cash used for financing activities in 2014 was due to decreased proceeds from stock<br />
option exercises, higher dividends paid and increased payments for repurchases of common stock. See “Liquidity and Cash Flows”<br />
in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.<br />
Backlog at December 31, 2015 includes approximately $15.6 billion related to Sikorsky and $4.8 billion related to our IS&GS<br />
business segment, which we plan to divest in 2016. Sikorsky backlog may change as we complete our acquired backlog analysis.<br />
27
ITEM 7.<br />
Management’s Discussion and Analysis of Financial Condition and Results of Operations.<br />
Business Overview<br />
We are a global security and aerospace company principally engaged in the research, design, development, manufacture,<br />
integration and sustainment of advanced technology systems, products and services. We also provide a broad range of<br />
management, engineering, technical, scientific, logistics and information services. We serve both U.S. and international<br />
customers with products and services that have defense, civil and commercial applications, with our principal customers<br />
being agencies of the U.S. Government. In 2015, 78% of our $46.1 billion in net sales were from the U.S. Government, either<br />
as a prime contractor or as a subcontractor (including 58% from the Department of Defense (DoD)), 21% were from<br />
international customers (including foreign military sales (FMS) contracted through the U.S. Government) and 1% were from<br />
U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security and<br />
information technology, including cybersecurity.<br />
We operate in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and<br />
Fire Control (MFC), Mission Systems and Training (MST) and Space Systems. We organize our business segments based on<br />
the nature of products and services offered.<br />
We operate in an environment characterized by both increasing complexity in global security and continuing economic<br />
pressures in the U.S. and globally. A significant component of our strategy in this environment is to focus on program<br />
execution, improving the quality and predictability of the delivery of our products and services and placing security<br />
capability quickly into the hands of our U.S. and international customers at affordable prices. Recognizing that our customers<br />
are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined manner with a<br />
focus on adjacent markets close to our core capabilities, as well as growing our international sales. We continue to focus on<br />
affordability initiatives. We also expect to continue to invest in technologies to fulfill new mission requirements for our<br />
customers and invest in our people so that we have the technical skills necessary to succeed without limiting our ability to<br />
return substantially all of our free cash flow 1 to our investors in the form of dividends and share repurchases over the next<br />
two years.<br />
We expect 2016 net sales will increase in the high single digit range from 2015 levels. The projected growth is driven by<br />
the addition of Sikorsky and increased volume expected on the F-35 program, offset by volume declines at our IS&GS and<br />
Space Systems business segments. We expect our 2016 segment operating profit will decline in the high single digit range<br />
from 2015 levels due to an expected decrease in segment operating profit at our IS&GS, MFC and Space Systems business<br />
segments. Operating margin is expected to decline due to costs associated with the Sikorsky acquisition, including the impact<br />
of purchase accounting adjustments, integration costs and inherited restructuring costs associated with actions committed to<br />
by Sikorsky prior to acquisition. Accordingly, we expect 2016 segment operating profit margin will be below 2015 levels, in<br />
the 10% range. Our 2016 outlook includes amounts for the government IT infrastructure services and technical services<br />
businesses we expect to divest. The 2016 outlook will not be adjusted to exclude these businesses until a divestiture is<br />
completed. Our outlook for 2016 assumes the U.S. Government continues to support and fund our key programs, consistent<br />
with the government fiscal year (GFY) 2016 budget. Changes in circumstances may require us to revise our assumptions,<br />
which could materially change our current estimate of 2016 net sales and operating profit margin. For additional information<br />
related to trends in net sales and operating profit at our business segments, see the “Business Segment Results of Operations”<br />
section below.<br />
Portfolio Shaping Activities<br />
We continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our<br />
customers. We accomplish this in part by our independent research and development activities and through acquisition,<br />
divestiture and internal realignment activities.<br />
We selectively pursue the acquisition of businesses and investments at attractive valuations that will expand or<br />
complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of<br />
businesses that no longer meet our needs or strategy or that could perform better outside of our organization. In pursuing our<br />
business strategy, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible<br />
acquisitions, divestitures, ventures and equity investments.<br />
1 We define free cash flow as cash from operations as determined under U.S. generally accepted accounting principles (GAAP), less capital<br />
expenditures as presented on our Statements of Cash Flows.<br />
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Strategic Actions<br />
Acquisition of Sikorsky Aircraft Corporation<br />
On November 6, 2015, pursuant to a Stock Purchase Agreement, dated as of July 19, 2015 by and between us and United<br />
Technologies Corporation (UTC) and certain wholly-owned subsidiaries of UTC, we completed the acquisition of Sikorsky<br />
Aircraft Corporation (Sikorsky) for $9.0 billion, net of cash acquired. Sikorsky, a global company primarily engaged in the<br />
design, manufacture, service and support of military and commercial helicopters, has become a wholly-owned subsidiary of<br />
ours, aligned under the MST business segment. We funded the acquisition with new debt issuances, commercial paper and<br />
cash on hand. We and UTC made a joint election under Section 338(h)(10) of the Internal Revenue Code, which treats the<br />
transaction as an asset purchase for tax purposes. This election generates a cash tax benefit with an estimated net present<br />
value of $1.9 billion for us and our stockholders. The financial results of the acquired Sikorsky business have been included<br />
in our consolidated results of operations from the November 6, 2015 acquisition date through December 31, 2015.<br />
Accordingly, the consolidated financial results for the year ended December 31, 2015 do not reflect a full year of Sikorsky<br />
operations. See “Capital Structure, Resources and Other” below for a discussion of the debt we incurred in connection with<br />
the Sikorsky acquisition.<br />
Strategic Review of Government Information Technology (IT) and Technical Services Businesses<br />
Information Systems & Global Solutions Divestiture<br />
On January 26, 2016 we entered into definitive agreements to separate and combine our Information Systems & Global<br />
Solutions (IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a tax-efficient Reverse Morris Trust transaction<br />
anticipated to unlock approximately $5.0 billion in estimated enterprise value for our stockholders, including a $1.8 billion<br />
one-time special cash payment to us. We intend to use the net proceeds of the transaction to repay debt, pay dividends or<br />
repurchase our stock. Additionally, our stockholders will receive approximately 50.5 percent of the outstanding equity of<br />
Leidos on a fully diluted basis (approximately 77 million shares) with an estimated value of $3.2 billion based on Leidos’<br />
stock price on the date of announcement. However, the actual value of the stock to be received by our stockholders will<br />
depend on the value of such shares at the time of closing of the transaction and our stockholders may receive more or less<br />
than the anticipated value. At our election, the distribution may be effected by means of a pro rata dividend in a spin-off<br />
transaction or in an exchange offer for outstanding Lockheed Martin Shares in a split-off transaction. The transaction<br />
structure, which is subject to market conditions, is currently contemplated to be a split-off transaction resulting in a decrease<br />
in our outstanding common shares and a significant book gain at closing. In a split-off transaction, only those stockholders<br />
that elect to participate will receive Leidos shares in the merger transaction, provided, that, if the exchange offer is not fully<br />
subscribed, Lockheed Martin will spin-off the remaining shares to be converted into Leidos stock in the merger pro rata.<br />
Subsequent to the program realignment described below, our IS&GS business segment represents the government IT and<br />
technical services businesses that were under strategic review. The transaction is expected to close in the third or fourth<br />
quarter of 2016. Until closing, IS&GS will operate as a business segment and financial results for the IS&GS business<br />
segment will be reported in our continuing operations.<br />
Program Realignment<br />
During the fourth quarter of 2015, we realigned certain programs among our business segments in connection with the<br />
strategic review of our government IT and technical services businesses. As part of the realignment:<br />
• command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) and government<br />
cyber programs were transferred from the IS&GS business segment to the MST business segment;<br />
• energy solutions programs were transferred from the IS&GS business segment to the MFC business segment;<br />
• space ground station programs were transferred from the IS&GS business segment to Space Systems business segment;<br />
and<br />
• technical services programs were transferred from the MFC business segment to the IS&GS business segment.<br />
Subsequent to the program realignment, the government IT and technical services businesses that were under strategic<br />
review are now aligned under the IS&GS business segment. The program realignment did not impact our consolidated results<br />
of operations. The amounts, discussion and presentation of our business segment financial results for all periods presented<br />
reflect this realignment.<br />
29
Other Acquisitions<br />
In addition to the previously described acquisition of Sikorsky in 2015, we had the following significant acquisition<br />
related activity in each of the prior two years:<br />
In 2014, we paid $898 million for acquisitions of businesses and investments in affiliates, net of cash acquired, primarily<br />
related to the following acquisitions:<br />
• Systems Made Simple – a provider of health information technology solutions, which is included in our IS&GS business<br />
segment;<br />
• Zeta Associates, Inc. – a designer of systems that enable collection, processing, safeguarding and dissemination of<br />
information for intelligence and defense communities, which is included in our Space Systems business segment; and<br />
• Industrial Defender – a provider of cybersecurity solutions for control systems in the oil and gas, utility and chemical<br />
industries, which is included in our IS&GS business segment.<br />
In 2013, we paid $269 million for acquisitions of businesses and investments in affiliates, net of cash acquired, primarily<br />
related to the acquisition of Amor Group, a United Kingdom-based company specializing in information technology, civil<br />
government services and the energy market. Amor Group is included in our IS&GS business segment.<br />
For additional information, see “Note 3 – Acquisitions and Divestitures” of our consolidated financial statements.<br />
Industry Considerations<br />
U.S. Government Funding Constraints<br />
The U.S. Government, our principal customer, continues to face significant fiscal and economic challenges such as<br />
financial deficits, budget uncertainty, increasing debt levels, and an economy with restrained growth. To address these<br />
challenges, the U.S. Government continues to focus on discretionary spending, entitlement programs, taxes, and other<br />
initiatives to stimulate the economy, create jobs, and reduce the deficit. In doing so, the Administration and Congress must<br />
balance decisions regarding defense, homeland security and other federal spending priorities in a constrained fiscal<br />
environment largely imposed by the Budget Control Act of 2011 (Budget Control Act). The Budget Control Act established<br />
limits on discretionary spending, which provided for reductions to planned defense spending of $487 billion over a 10 year<br />
period that began with GFY 2012 (a U.S. Government fiscal year starts on October 1 and ends on September 30). The Budget<br />
Control Act also provided for additional automatic spending reductions, known as sequestration, which went into effect on<br />
March 1, 2013, that would have reduced planned defense spending by an additional $500 billion over a nine-year period that<br />
began in GFY 2013.<br />
On November 2, 2015, the President signed into law the Bipartisan Budget Act of 2015 (BBA 2015). BBA 2015 raises<br />
the limit on the government’s debt until March 2017 and raises the sequester caps imposed by the Budget Control Act by<br />
$80 billion, split equally between defense and non-defense spending over the next two years ($50 billion in GFY 2016 and<br />
$30 billion in GFY 2017). On December 18, 2015, the President signed into law the Consolidated Appropriations Act of<br />
2016, funding the government through September 30, 2016 and on February 9, 2016, the President submitted a budget<br />
proposal for GFY 2017, consistent with BBA 2015 funding levels. BBA 2015 includes discretionary funding for DoD of<br />
approximately $580 billion in GFY 2016 and $583 billion in GFY 2017. This funding includes a base budget for the DoD of<br />
approximately $521 billion in GFY 2016 and $524 billion in GFY 2017. BBA 2015 also provides approximately $59 billion<br />
for DoD Overseas Contingency Operations (OCO) spending in each of GFY 2016 and GFY 2017.<br />
The Bipartisan Budget Act of 2013 (BBA 2013) passed by Congress in December 2013 alleviated some budget cuts that<br />
would have otherwise been instituted through sequestration in GFY 2014 and GFY 2015. Together, BBA 2013 and BBA<br />
2015 (collectively, the Bipartisan Budget Acts) increased discretionary spending limits through GFY 2017. However, the<br />
Bipartisan Budget Acts retained sequestration cuts for GFYs 2018 through 2021, including the across-the-board spending<br />
reduction methodology provided for in the Budget Control Act. As a result, there remains uncertainty regarding how, or if,<br />
sequestration cuts will be applied in GFY 2018 and beyond. DoD and other agencies may have significantly less flexibility in<br />
how to apply budget cuts in future years. While the defense budget sustained the largest single reductions under the Budget<br />
Control Act, other civil agencies and programs have also been impacted by significant spending reductions. In light of the<br />
Budget Control Act and deficit reduction pressures, it is likely that discretionary spending by the U.S. Government will<br />
remain constrained for a number of years. Additionally, if an annual appropriations bill is not enacted for GFY 2017 or<br />
beyond, the U.S. Government may operate under a continuing resolution, restricting new contract or program starts and<br />
30
government shutdowns could arise. We anticipate there will continue to be significant debate within the U.S. Government<br />
over defense spending throughout the budget appropriations process for GFY 2017 and beyond. The outcome of these<br />
debates could have long-term consequences for our industry and company as described below. However, we continue to<br />
believe that our portfolio of products and services will continue to be well supported in a strategically focused allocation of<br />
budget resources.<br />
Potential Impacts of Budget Reductions<br />
While recent budget actions provide a more measured and strategic approach to addressing the U.S. Government’s fiscal<br />
challenges, sequestration remains a long-term concern. If not further modified, sequestration could have significant negative<br />
impacts on our industry and company in future periods. There may be disruption of ongoing programs, impacts to our supply<br />
chain, contractual actions (including partial or complete terminations), potential facilities closures, and thousands of<br />
personnel reductions across the industry that will severely impact advanced manufacturing operations and engineering<br />
expertise, and accelerate the loss of skills and knowledge. Sequestration, or other budgetary cuts in lieu of sequestration,<br />
could have a material negative effect on our company.<br />
Despite the continued uncertainty surrounding U.S. Government budgets, we have sought to align our businesses with<br />
what we believe are the most critical national priorities and mission areas. Additionally, we are seeking to lessen our<br />
dependence on contracts with the U.S. Government by focusing on expanding into adjacent markets close to our core<br />
capabilities and growing international sales but we may not be successful in this strategy. The possibility remains, however,<br />
that our programs could be materially reduced, extended, or terminated as a result of the U.S. Government’s continuing<br />
assessment of priorities, changes in government priorities, or budget reductions, including sequestration (particularly in those<br />
circumstances where sequestration is implemented across-the-board without regard to national priorities). Additionally,<br />
decreases in production volume associated with budget cuts, including sequestration, will increase unit costs making our<br />
products less affordable for both our U.S. and international customers. In particular, if sequestration level spending cuts are<br />
reinstated in GFY 2018, we may experience significant rescheduling or termination activity with our supplier base. Such<br />
activity could result in claims from our suppliers, which may include the amount established in any settlement agreements,<br />
the costs of evaluating the supplier settlement proposals, and the costs of negotiating settlement agreements. Budget cuts,<br />
including sequestration, could result in restructuring charges, impairment of assets, including goodwill, or other charges. We<br />
expect costs associated with claims from our suppliers and restructuring charges will be recovered from our customers.<br />
Generally, we expect that the impact of budget reductions on our operating results will lag in certain of our businesses<br />
with longer cycles such as our Aeronautics and Space Systems business segments, and our products businesses within our<br />
MFC and MST business segments, due to our production contract backlog. However, our businesses with smaller, short-term<br />
contracts are the most susceptible to the impacts of budget reductions, such as our IS&GS business segment. We have also<br />
experienced increased market pressures in these services businesses including lower in-theater support as troop levels are<br />
drawn down and increased re-competition on existing contracts coupled with the fragmentation of large contracts into<br />
multiple smaller contracts that are awarded primarily on the basis of price. Additionally, our services businesses across most<br />
of our business segments have experienced lower volume due to improved product field performance that require less service<br />
support.<br />
International Business<br />
A key component of our strategic plan is to grow our international sales. To accomplish this growth, we continue to<br />
focus on expanding our in-country presence and strengthening our relationships internationally through partnerships and<br />
local production joint technology offices. Since 2013, we have acquired Amor Group, a United Kingdom-based company,<br />
and we have opened new in-country offices including in Israel, United Kingdom, the United Arab Emirates (UAE), Saudi<br />
Arabia and Qatar that will enable development of ventures to create products and enhance our offerings in technology,<br />
aerospace and security sectors. We conduct business with international customers primarily through our Aeronautics, MFC<br />
and MST business segments.<br />
In our Aeronautics business segment, there remains strong international interest in the F-35 program. The F-35 program<br />
includes commitments from eight international partner countries and three international customers; as well as expressions of<br />
interest from other countries. The U.S. Government and the eight partner countries continue to work together on the design,<br />
testing, production and sustainment of the F-35. The international role on the program continues to grow as we have<br />
successfully delivered aircraft to five international partners, including the first two Norwegian aircraft. In 2015, the first<br />
Italian Final Assembly and Check-Out Facility produced F-35 aircraft was delivered. The award of the Low Rate Initial<br />
Production (LRIP) 9 undefinitized contract action in 2015 included 21 international orders for four international partners and<br />
customers.<br />
31
Other areas of international expansion at our Aeronautics business segment include the F-16 and C-130J programs. In<br />
2015, the Iraqi F-16 contract was definitized and production continues into 2017. Also, the award from Singapore in 2015 for<br />
F-16 aircraft upgrades establishes work into 2023. The C-130J Super Hercules aircraft continued to draw interest from<br />
various international customers in 2015.<br />
Our MFC business segment produces the Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area<br />
Defense (THAAD) air and missile defense systems, which continue to generate significant international interest. The PAC-3<br />
is an advanced missile defense system designed to intercept incoming airborne threats. During 2015 we received orders for<br />
PAC-3 systems from the Kingdom of Saudi Arabia and South Korea, in addition to the award we received in 2014 to provide<br />
PAC-3 missile defense equipment to Qatar. THAAD international customers include the UAE. Other international customers<br />
include Japan, Germany, the Netherlands, Taiwan and Kuwait. Other countries in the Middle East, Europe and the Asia-<br />
Pacific region have also expressed interest in our air and missile defense systems. Additionally, we continue to see<br />
international demand for our tactical missile and fire control products.<br />
In our MST business segment, we continue to experience international interest in the Aegis Ballistic Missile Defense<br />
System. We perform activities in the development, production, ship integration and test and lifetime support for ships of<br />
international customers such as Japan, Spain, Korea and Australia. We have an ongoing program in Canada for combat<br />
systems equipment upgrades on 13 Halifax-class frigates. In our training and logistics solutions portfolio, we have active<br />
programs and pursuits in United Kingdom, Saudi Arabia, Canada, Singapore, Qatar, and Australia.<br />
Our acquisition of Sikorsky adds a significant international component to the MST business segment with an installed<br />
base of over 1,000 aircraft internationally. We have active development, production, and sustainment support of the UH-60<br />
Black Hawk and MH-60 Seahawk aircraft to foreign military customers, including Australia, Denmark, Taiwan, Saudi<br />
Arabia, and Colombia. The S-76 and S-92 aircraft is sold to commercial customers in the oil and gas industry, emergency<br />
medical evacuation, and search and rescue fleets in over 30 countries, including customers and end-users in China, Japan,<br />
Brazil, Saudi Arabia, the UAE, and the United Kingdom.<br />
Status of the F-35 Program<br />
The F-35 program consists of a development contracts, multiple production contracts and sustainment activities. The<br />
development contracts are being performed concurrent with the production contracts. Concurrent performance of<br />
development and production contracts is used for complex programs to test aircraft, shorten the time to field systems, and<br />
achieve overall cost savings. We expect the System Development and Demonstration portion of the development contracts<br />
will be substantially complete in 2017, with less significant efforts continuing into 2019. Production of the aircraft is<br />
expected to continue for many years given the U.S. Government’s current inventory objective of 2,443 aircraft for the Air<br />
Force, Marine Corps, and Navy; commitments from our eight international partners and three international customers; as<br />
well as expressions of interest from other countries.<br />
The U.S. Government continues to complete various operational tests, including ship trials, mission system evaluations,<br />
and weapons testing, with the F-35 aircraft fleet recently surpassing 50,000 flight hours. Progress continues to be made on<br />
the production of aircraft. In July 2015, the U.S. Marine Corps declared that the F-35B had reached initial operating<br />
capability, which makes it the first variant available for combat. As of December 31, 2015, we have delivered 154 production<br />
aircraft to our U.S. and international partners including delivery of the first Italian Final Assembly and Check-Out Facility<br />
produced F-35, and have 114 production aircraft in backlog, including orders from our international partners.<br />
Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft<br />
performance, program schedule, cost, and requirements as part of the DoD, Congressional, and international partners’<br />
oversight and budgeting processes. Current program challenges include, but are not limited to, supplier and partner<br />
performance, software development, level of cost associated with life cycle operations and sustainment and warranties,<br />
receiving funding for production contracts on a timely basis, executing future flight tests, findings resulting from testing, and<br />
operating the aircraft.<br />
Cybersecurity<br />
On July 9, 2015, the U.S. Office of Personnel Management (OPM) announced that the background investigation records<br />
of 21.5 million current, former and prospective Federal employees and contractors had been compromised as a result of a<br />
cyber-security incident. Many of our current as well as former employees were the subjects of background investigations in<br />
32
connection with former government service or as part of the screening process for a security clearance. We are currently<br />
assessing the impact of this cyber-security incident but do not yet know the impact, if any, on Lockheed Martin or our current<br />
or former employees.<br />
Consolidated Results of Operations<br />
Since our operating cycle is primarily long term and involves many types of contracts for the design, development and<br />
manufacture of products and related activities with varying delivery schedules, the results of operations of a particular year,<br />
or year-to-year comparisons of sales and profits, may not be indicative of future operating results. The following discussions<br />
of comparative results among years should be reviewed in this context. All per share amounts cited in these discussions are<br />
presented on a “per diluted share” basis, unless otherwise noted. Our consolidated results of operations were as follows<br />
(in millions, except per share data):<br />
2015 2014 2013<br />
Net sales $ 46,132 $ 45,600 $ 45,358<br />
Cost of sales (40,932) (40,345) (41,171)<br />
Gross profit 5,200 5,255 4,187<br />
Other income, net 236 337 318<br />
Operating profit (a) 5,436 5,592 4,505<br />
Interest expense (443) (340) (350)<br />
Other non-operating income, net 30 6 —<br />
Earnings from continuing operations before income taxes 5,023 5,258 4,155<br />
Income tax expense (1,418) (1,644) (1,205)<br />
Net earnings from continuing operations 3,605 3,614 2,950<br />
Net earnings from discontinued operations — — 31<br />
Net earnings $ 3,605 $ 3,614 $ 2,981<br />
Diluted earnings per common share<br />
Continuing operations $ 11.46 $ 11.21 $ 9.04<br />
Discontinued operations — — .09<br />
Total diluted earnings per common share $ 11.46 $ 11.21 $ 9.13<br />
(a)<br />
Operating profit includes $45 million of operating loss at Sikorsky, which is less than one percent of consolidated operating profit in<br />
2015. Sikorsky’s operating loss is net of intangible amortization and adjustments required to account for the acquisition of this<br />
business in the fourth quarter of 2015.<br />
Certain amounts reported in other income, net, primarily our share of earnings or losses from equity method investees,<br />
are included in the operating profit of our business segments. Accordingly, such amounts are included in our discussion of<br />
our business segment results of operations.<br />
Net Sales<br />
We generate sales from the delivery of products and services to our customers. Product sales are predominantly<br />
generated in our Aeronautics, MFC, MST and Space Systems business segments and most of our service sales are generated<br />
in our IS&GS and MST business segments. Our consolidated net sales were as follows (in millions):<br />
2015 2014 2013<br />
Products $35,882 $36,093 $35,691<br />
Services 10,250 9,507 9,667<br />
Total net sales $46,132 $45,600 $45,358<br />
Substantially all of our contracts are accounted for using the percentage-of-completion method. Under the percentage-ofcompletion<br />
method, we record net sales on contracts based upon our progress towards completion on a particular contract, as<br />
well as our estimate of the profit to be earned at completion. The following discussion of material changes in our<br />
consolidated net sales should be read in tandem with the subsequent discussion of changes in our consolidated cost of sales<br />
and our business segment results of operations because changes in our sales are typically accompanied by a corresponding<br />
change in our cost of sales due to the nature of the percentage-of-completion method.<br />
33
Product Sales<br />
Our product sales represent 78% of our total sales in 2015 and 79% of our total sales in 2014. Product sales decreased<br />
$211 million, or 1%, in 2015 as compared to 2014. Lower product sales of about $290 million at Space Systems,<br />
approximately $250 million at MFC and approximately $110 million at IS&GS were offset by higher product sales of about<br />
$320 million at MST and approximately $120 million at Aeronautics. The decrease in product sales at Space Systems was<br />
attributable to lower volume for government satellite programs (primarily Advanced Extremely High Frequency (AEHF).<br />
Product sales at MFC decreased due to lower volume on air and missile defense systems programs (primarily PAC-3). The<br />
decline in product sales at IS&GS was a result of key program completions, lower customer funding levels and increased<br />
competition, coupled with the fragmentation of existing large contracts into multiple smaller contracts that are awarded<br />
primarily on the basis of price. The increase in product sales at MST was primarily attributable to product sales from<br />
Sikorsky, which we acquired in the fourth quarter of 2015. Product sales at Aeronautics increased primarily due to higher<br />
volume on F-35 production contracts, as well as increased deliveries on our C-5 program; partially offset by fewer aircraft<br />
deliveries for our C-130 and F-16 programs and lower sustainment activities on our F-22 program.<br />
Our product sales represent 79% of our total sales in both 2014 and 2013. Product sales increased $402 million, or 1%,<br />
in 2014 as compared to 2013. Higher product sales of about $815 million at Aeronautics and approximately $280 million at<br />
MFC were partially offset by lower product sales of about $275 million at Space Systems, approximately $235 million at<br />
IS&GS and approximately $185 million at MST. The increase in product sales at Aeronautics was attributable to higher<br />
volume on F-35 production contracts and sustainment activities, increased aircraft deliveries (F-16 program) and increased<br />
risk retirements (F-22 program). Product sales at MFC increased as a result of increased volume on air and missile defense<br />
systems programs (primarily THAAD), and increased deliveries on fire control programs (including the Apache Fire Control<br />
System (Apache)). The decline in product sales at Space Systems was due to lower volume for government satellite programs<br />
(primarily Advanced Extremely High Frequency (AEHF), Global Positioning System III (GPS-III), and Mobile User<br />
Objective System (MUOS)); and as a result of mission solutions’ programs transitioning from development to operations and<br />
support, wind-down or completion of certain programs, and defense budget cuts. The decline in product sales at Space<br />
Systems was partially offset by increased volume in the Orion program (primarily the first unmanned test flight of the Orion<br />
Multi-Purpose Crew Vehicle (MPCV)). Lower product sales at IS&GS were primarily due to the wind down or completion<br />
of certain programs and decreased volume in technical services programs reflecting market pressures. Lower product sales at<br />
MST were primarily driven by the wind-down or completion of certain command, control, communications, computers,<br />
intelligence, surveillance and reconnaissance (C4ISR) programs (primarily PTDS).<br />
Service Sales<br />
Our service sales represent 22% of our total sales in 2015 and 21% of our total sales in 2014. Service sales increased<br />
$743 million, or 8%, in 2015 as compared to 2014. The increase in service sales was primarily attributable to higher service<br />
sales of approximately $530 million at Aeronautics and about $190 million at Space Systems. Higher service sales at<br />
Aeronautics were primarily due to increased sustainment activities (primarily F-35). The increase in service sales at Space<br />
Systems was primarily due to service sales of entities acquired in the third quarter of 2014.<br />
Our service sales represent 21% of our total sales in both 2014 and 2013. Service sales decreased $160 million, or 2%, in<br />
2014 as compared to 2013. Lower service sales of approximately $225 million at IS&GS and approximately $120 million at<br />
MST were partially offset by higher service sales at Space Systems of about $190 million. The decline in service sales at<br />
IS&GS was primarily due to various technical services programs as a result of decreased volume reflecting market pressures.<br />
The decline in service sales at MST was primarily due to the wind-down or completion of certain programs. The increase in<br />
sales at Space Systems was primarily due to commercial space transportation programs resulting from launch-related<br />
activities.<br />
34
Cost of Sales<br />
Cost of sales, for both products and services, consist of materials, labor, subcontracting costs, an allocation of indirect<br />
costs (overhead and general and administrative), as well as the costs to fulfill our industrial cooperation agreements,<br />
sometimes referred to as offset agreements, required under certain contracts with international customers. For each of our<br />
contracts, we monitor the nature and amount of costs at the contract level, which form the basis for estimating our total costs<br />
to complete the contract. Our consolidated cost of sales were as follows (in millions):<br />
2015 2014 2013<br />
Cost of sales – products $(32,006) $(31,965) $(31,346)<br />
% of product sales 89.2% 88.6% 87.8%<br />
Cost of sales – services (9,011) (8,393) (8,588)<br />
% of service sales 87.9% 88.3% 88.8%<br />
Goodwill impairment charges — (119) (195)<br />
Severance charges (102) — (201)<br />
Other unallocated, net 187 132 (841)<br />
Total cost of sales $(40,932) $(40,345) $(41,171)<br />
Due to the nature of percentage-of-completion accounting, changes in our cost of sales for both products and services are<br />
typically accompanied by changes in our net sales. The following discussion of material changes in our consolidated cost of<br />
sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net<br />
sales and our business segment results of operations. We have not identified any developing trends in cost of sales for<br />
products and services that would have a material impact on our future operations.<br />
Product Costs<br />
Product costs increased approximately $41 million, or less than 1%, in 2015 as compared to 2014. Increased product<br />
costs of approximately $445 million at MST and about $180 million at Aeronautics, were offset by decreases in product costs<br />
of approximately $325 million at Space Systems, $195 million at MFC and $65 million at IS&GS. Increases in product costs<br />
at MST were due primarily to the Sikorsky acquisition, including costs of Sikorsky products, intangible amortization and<br />
adjustments required to account for the acquisition in the fourth quarter of 2015. Higher product costs at Aeronautics were<br />
attributable to the reasons stated above for higher product sales, as well as decreased risk retirements (primarily F-22). The<br />
changes in product costs at Space Systems, MFC and IS&GS were attributable to the reasons stated above for higher product<br />
sales.<br />
Product costs increased $619 million, or 2%, in 2014 as compared to 2013. Product costs increased approximately<br />
$815 million at Aeronautics and approximately $325 million at MFC. Increases in product costs at Aeronautics and MFC<br />
were primarily due to the reasons described above for higher product sales at each respective business segment and net<br />
warranty reserve adjustments recorded in 2014 at MFC (including Joint Air-to-Surface Standoff Missile (JASSM), and<br />
Guided Multiple Launcher Rocker Systems (GMLRS)). These increases in product costs were partially offset by decreases of<br />
about $195 million at IS&GS, $255 million at Space Systems and $70 million at MST, primarily due to the reasons described<br />
above for lower product sales at each respective business segment. Additionally, lower product costs at MST were partially<br />
offset by costs related to the settlements of contract cost matters on certain programs in the prior year (including a portion of<br />
the terminated presidential helicopter program) that were not repeated in 2014 and higher reserves recorded on certain<br />
training and logistics solutions programs during 2014. The 0.8% increase in product costs as a percentage of product sales in<br />
2014 compared to 2013 was primarily due to the reasons described above for increasing product costs at MFC, and decreased<br />
risk retirements at Aeronautics (primarily F-16).<br />
Service Costs<br />
Service costs increased $618 million, or 7%, in 2015 compared to 2014. Higher service costs of approximately<br />
$450 million at Aeronautics and about $230 million at Space Systems were due to the reasons stated above for higher service<br />
sales. These increases in service costs were partially offset by a decrease in service costs of about $80 million at MFC due<br />
primarily to lower service costs on various air and missile defense programs.<br />
Service costs decreased $195 million, or 2%, in 2014 as compared to 2013. Lower service costs of about $230 million at<br />
IS&GS, approximately $100 million at MST, and approximately $40 million at Aeronautics were partially offset by an<br />
increase in service costs of approximately $160 million at Space Systems. The decline at IS&GS was primarily attributable to<br />
35
lower volume for various technical services programs. The decline at MST was primarily attributable to lower costs upon<br />
wind-down or completion of certain programs. The decline at Aeronautics was mostly attributable to decreased sustainment<br />
activities. The increase at Space Systems was primarily attributable to commercial space transportation programs due to<br />
launch-related activities. The 0.5% decrease in service costs as a percentage of service sales in 2014 compared to 2013 was<br />
primarily due to items decreasing service costs at IS&GS.<br />
Goodwill Impairment Charges<br />
In the fourth quarter of 2015, we performed our annual goodwill impairment test for each of our reporting units.<br />
Additionally, as part of our previously described program realignment, goodwill was re-allocated between affected reporting<br />
units on a relative fair value basis and goodwill impairment tests were performed prior and subsequent to the realignment. In<br />
connection with our goodwill impairment testing in 2015, we determined there was no goodwill impairment.<br />
In the fourth quarters of 2014 and 2013, we recorded non-cash goodwill impairment charges of $119 million and<br />
$195 million, which reduced our net earnings by $107 million ($.33 per share) and $176 million ($.54 per share). For<br />
additional information, see the “Critical Accounting Policies – Goodwill” section below and “Note 1 – Significant<br />
Accounting Policies” of our consolidated financial statements.<br />
Restructuring Charges<br />
2015 Actions<br />
During 2015, we recorded charges related to certain severance actions totaling $102 million, of which $67 million<br />
related to our MST business segment and $35 million related to our IS&GS business segment (prior to realignment). These<br />
charges reduced our 2015 net earnings by $66 million ($.21 per share). These severance actions resulted from a review of<br />
future workload projections and to reduce our costs in order to improve the affordability of our products and services. The<br />
charges consisted of severance costs associated with the planned elimination of certain positions through either voluntary or<br />
involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on<br />
years of service, the majority of which are expected to be paid over the next several quarters. As of December 31, 2015, we<br />
have paid approximately $18 million in severance payments associated with these actions.<br />
In connection with the Sikorsky acquisition, we assumed obligations related to certain restructuring actions committed to<br />
by Sikorsky in June 2015. These actions included a global workforce reduction of approximately 1,400 production-related<br />
positions and facilities consolidations. As of December 31, 2015, accrued restructuring costs associated with these actions are<br />
approximately $15 million, all of which are expected to be paid in 2016. Net of amounts we anticipate to recover through the<br />
pricing of our products and services to our customers, we also expect to incur an additional $40 million of costs in 2016<br />
related to these actions.<br />
2013 Actions<br />
During 2013, we recorded charges related to certain severance actions totaling $201 million, of which $83 million,<br />
$37 million and $81 million related to our IS&GS, MST and Space Systems business segments (prior to realignment). These<br />
charges reduced our 2013 net earnings by $130 million ($.40 per share) and primarily related to a plan we committed to in<br />
November 2013 to close and consolidate certain facilities and reduce our total workforce by approximately 4,000 positions.<br />
These charges also include $30 million related to certain severance actions that occurred in the first quarter of 2013, which<br />
were subsequently paid in 2013.<br />
The November 2013 plan resulted from a strategic review of these businesses’ facility capacity and future workload<br />
projections. Upon separation, terminated employees receive lump-sum severance payments primarily based on years of<br />
service. As of December 31, 2015, we have paid approximately $153 million in severance payments associated with this<br />
action, of which approximately $46 million, $92 million and $15 million was paid in 2015, 2014 and 2013, respectively. The<br />
remaining severance payments are expected to be paid in 2016.<br />
We also expect to incur total accelerated costs (e.g., accelerated depreciation expense related to long-lived assets at sites<br />
closed) and incremental costs (e.g., relocation of equipment and other employee related costs) of approximately $10 million,<br />
$50 million and $180 million at our IS&GS, MST and Space Systems business segments through the completion of this plan<br />
in 2016. As of December 31, 2015, we have incurred total accelerated and incremental costs of approximately $225 million,<br />
of which approximately $115 million, $90 million and $20 million was recorded in 2015, 2014 and 2013, respectively. The<br />
accelerated and incremental costs are recorded as incurred in cost of sales on our Statements of Earnings and included in the<br />
respective business segment’s results of operations.<br />
36
We expect to recover a substantial amount of the restructuring charges through the pricing of our products and services<br />
to the U.S. Government and other customers, with the impact included in the respective business segment’s results of<br />
operations. Of the total severance, accelerated and incremental costs mentioned above, we recovered approximately<br />
$65 million in 2015 and $50 million in 2014 and expect to recover approximately $60 million in 2016.<br />
Other Unallocated, Net<br />
Other unallocated, net primarily includes the FAS/CAS pension adjustment as described in the Business Segment<br />
Results of Operations section below, stock-based compensation and other corporate costs. These items are not allocated to<br />
the business segments and, therefore, are excluded from the cost of sales for products and services. Other unallocated, net<br />
was $187 million of income in 2015, $132 million of income in 2014 and $841 million of expense in 2013.<br />
The fluctuation between each respective period was primarily attributable to the change in the FAS/CAS pension<br />
adjustment to income of $471 million in 2015 and $376 million in 2014, compared to expense of $482 million in 2013,<br />
partially offset by fluctuations in other costs associated with various corporate items, none of which were individually<br />
significant. The changes in the FAS/CAS pension adjustment between the periods were attributable to various items<br />
impacting the calculations of financial accounting standards (FAS) pension expense and U.S. Government Cost Accounting<br />
Standards (CAS) pension cost. FAS pension expense in 2015 and 2014 was less than 2013 primarily due to the June 2014<br />
plan amendments to certain of our defined benefit pension plans to freeze future retirement benefits, partially offset by the<br />
impact of using new longevity (also known as mortality) assumptions (Note 11). The higher CAS pension cost in 2015 and<br />
2014 compared to 2013 primarily reflects the impact of phasing in CAS Harmonization. See “Critical Accounting Policies –<br />
Postretirement Benefit Plans” for more discussion of our CAS pension cost.<br />
Other Income, Net<br />
Other income, net primarily includes our share of earnings or losses from equity method investees and other various<br />
items. Other income, net in 2015 was $236 million, compared to $337 million in 2014 and $318 million in 2013. The<br />
decrease in 2015, compared to 2014, was primarily due to a $90 million non-cash impairment charge related to our decision<br />
to divest Lockheed Martin Commercial Flight Training (LMCFT) in 2016 and non-recoverable transaction costs of<br />
approximately $45 million associated with the Sikorsky acquisition and the strategic review of our government IT and<br />
technical services businesses, partially offset by fluctuations in other various costs, none of which were individually<br />
significant. The asset impairment charge was partially offset by a net deferred tax benefit related to LMCFT of about<br />
$80 million, which is recorded in income tax expense. Earnings from equity method investees in 2015 were comparable to<br />
2014 (reflecting decreased earnings from equity method investees in our Space Systems business segment, offset by<br />
increased earnings form Sikorsky equity method investees). The increase in 2014, compared to 2013, was primarily due to<br />
fluctuations in earnings from equity method investees in our Aeronautics and Space Systems business segments, as discussed<br />
in the “Business Segment Results of Operations” section below.<br />
Interest Expense<br />
Interest expense in 2015 was $443 million, compared to $340 million in 2014 and $350 million in 2013. The increase in<br />
interest expense in 2015 relates to debt we incurred to fund the acquisition of Sikorsky, and the issuance of notes in February<br />
of 2015 for general corporate purposes. See “Capital Structure, Resources and Other” for a discussion of our debt.<br />
Other Non-Operating Income, Net<br />
Other non-operating income, net increased $24 million from 2014 to 2015 primarily due to a gain from the sale of an<br />
investment in 2015. Other non-operating income, net in 2014 was comparable to 2013.<br />
Income Tax Expense<br />
Our effective income tax rate from continuing operations was 28.2% for 2015, 31.3% for 2014, and 29.0% for 2013. The<br />
rates for all periods benefited from tax deductions for U.S. manufacturing activities, deductions for dividends paid to our<br />
defined contribution plans with an employee stock ownership plan feature and the retroactive reinstatement of the U.S.<br />
research and development (R&D) tax credit. These benefits were partially offset by the unfavorable impacts of the non-cash<br />
goodwill impairment charges in 2014 and 2013. The U.S. manufacturing deduction benefit for 2015, 2014 and 2013 reduced<br />
our effective tax rate by approximately two percentage points.<br />
37
In 2015, the R&D tax credit was permanently extended and reinstated, retroactive to the beginning of 2015, which<br />
reduced our effective income tax rate by 1.4 percentage points. In 2014, the R&D tax credit was temporarily reinstated for<br />
one year, retroactive to the beginning of 2014, which reduced our effective tax rate by 0.9 percentage point. In 2013, the<br />
R&D tax credit was temporarily reinstated for two years, retroactive to the beginning of 2012. As a result, the effective<br />
income tax rate for 2013 reflects the credit for all of 2013 and 2012, which reduced our effective tax rate by 1.8 percentage<br />
points.<br />
As a result of electing to treat the acquisition of the stock of Sikorsky as an asset acquisition under section 338(h)(10) of<br />
the Internal Revenue Code, we expect tax deductions for the amortization of intangibles and goodwill over 15 years to reduce<br />
our tax payments by a net present value of approximately $1.9 billion.<br />
As a result of a decision in 2015 to divest LMCFT in 2016, we recorded an asset impairment charge of approximately<br />
$90 million. This charge was partially offset by a net deferred tax benefit of about $80 million. The net impact of the<br />
resulting tax benefit reduced the effective income tax rate by 1.0 percentage point in 2015.<br />
A limited amount of the non-cash goodwill impairment charges will be deductible for tax purposes. Accordingly, the<br />
non-cash goodwill impairment charges increased our effective income tax rates by 0.6 percentage point for 2014 and<br />
1.2 percentage points for 2013 (Note 1).<br />
Future changes in tax law could significantly impact our provision for income taxes, the amount of taxes payable, and<br />
our deferred tax asset and liability balances. Recent proposals to lower the U.S. corporate income tax rate would require us to<br />
reduce our net deferred tax assets upon enactment of new tax legislation, with a corresponding material, one-time, non-cash<br />
increase in income tax expense, but our income tax expense and payments would be materially reduced in subsequent years.<br />
Our net deferred tax assets as of December 31, 2015 and 2014 were $5.9 billion and $5.5 billion, based on a 35% Federal<br />
statutory income tax rate, and primarily relate to our postretirement benefit plans. If legislation reducing the Federal statutory<br />
income tax rate to 25% had been enacted at December 31, 2015, our net deferred tax assets would have been reduced by<br />
$1.7 billion and we would have recorded a corresponding one-time, non-cash increase in income tax expense of $1.7 billion.<br />
This additional expense would be less if the legislation phased in the tax rate reduction or if the final rate was higher than<br />
25%. The amount of net deferred tax assets will change periodically based on several factors, including the measurement of<br />
our postretirement benefit plan obligations and actual cash contributions to our postretirement benefit plans.<br />
Net Earnings from Continuing Operations<br />
We reported net earnings from continuing operations of $3.6 billion ($11.46 per share) in 2015, $3.6 billion ($11.21 per<br />
share) in 2014 and $3.0 billion ($9.04 per share) in 2013. Both net earnings and earnings per share from continuing<br />
operations were affected by the factors mentioned above. Earnings per share also benefited from a net decrease of<br />
approximately eleven million common shares outstanding from December 31, 2014 to December 31, 2015 and<br />
approximately five million common shares outstanding from December 31, 2013 to December 31, 2014 as a result of share<br />
repurchases, which were partially offset by share issuance under our stock-based awards and certain defined contribution<br />
plans.<br />
Net Earnings from Discontinued Operations<br />
Net earnings from discontinued operations for 2013 include a benefit of $31 million resulting from the resolution of<br />
certain tax matters related to a business sold prior to 2013.<br />
38
Business Segment Results of Operations<br />
We operate in five business segments: Aeronautics, IS&GS, MFC, MST and Space Systems. We organize our business<br />
segments based on the nature of products and services offered. Net sales of our business segments exclude intersegment sales<br />
as these activities are eliminated in consolidation. The amounts, discussion and presentation of our business segments as set<br />
forth in this Annual Report on Form 10-K reflect the program realignment described above for all periods presented<br />
and include the results of the acquired Sikorsky business from the November 6, 2015 acquisition date through<br />
December 31, 2015.<br />
Operating profit of our business segments includes our share of earnings or losses from equity method investees because<br />
the operating activities of the equity method investees are closely aligned with the operations of our business segments.<br />
United Launch Alliance (ULA), which is part of our Space Systems business segment, is our primary equity method investee.<br />
Operating profit of our business segments excludes the FAS/CAS pension adjustment described below; expense for stockbased<br />
compensation; the effects of items not considered part of management’s evaluation of segment operating performance,<br />
such as charges related to goodwill impairments (Note 1) and significant severance actions (Note 15); gains or losses from<br />
divestitures (Note 3); the effects of certain legal settlements; corporate costs not allocated to our business segments; and<br />
other miscellaneous corporate activities. These items are included in the reconciling item “Unallocated items” between<br />
operating profit from our business segments and our consolidated operating profit.<br />
Our business segments’ results of operations include pension expense only as calculated under U.S. Government Cost<br />
Accounting Standards, which we refer to as CAS pension cost. We recover CAS pension cost through the pricing of our<br />
products and services on U.S. Government contracts and, therefore, the CAS pension cost is recognized in each of our<br />
business segments’ net sales and cost of sales. Since our consolidated financial statements must present pension expense<br />
calculated in accordance with FAS requirements under U.S. generally accepted accounting principles (GAAP), which we<br />
refer to as FAS pension expense, the FAS/CAS pension adjustment increases or decreases the CAS pension cost recorded in<br />
our business segments’ results of operations to equal the FAS pension expense. As a result, to the extent that CAS pension<br />
cost exceeds FAS pension expense, which occurred for 2015 and 2014, we have FAS/CAS pension income and, conversely,<br />
to the extent FAS pension expense exceeds CAS pension cost, which occurred for 2013, we have FAS/CAS pension expense.<br />
39
The operating results in the following tables exclude businesses included in discontinued operations (Note 13) for all<br />
years presented. Summary operating results for each of our business segments were as follows (in millions):<br />
2015 2014 2013<br />
Net sales<br />
Aeronautics $15,570 $14,920 $14,123<br />
Information Systems & Global Solutions 5,596 5,654 6,115<br />
Missiles and Fire Control 6,770 7,092 6,795<br />
Mission Systems and Training 9,091 8,732 9,037<br />
Space Systems 9,105 9,202 9,288<br />
Total net sales $46,132 $45,600 $45,358<br />
Operating profit<br />
Aeronautics $ 1,681 $ 1,649 $ 1,612<br />
Information Systems & Global Solutions 508 472 498<br />
Missiles and Fire Control 1,282 1,344 1,379<br />
Mission Systems and Training 844 936 1,065<br />
Space Systems 1,171 1,187 1,198<br />
Total business segment operating profit 5,486 5,588 5,752<br />
Unallocated items<br />
FAS/CAS pension adjustment<br />
FAS pension expense (a) (1,142) (1,144) (1,948)<br />
Less: CAS pension cost (b) 1,613 1,520 1,466<br />
FAS/CAS pension income (expense) (c) 471 376 (482)<br />
Goodwill impairment charges (d) — (119) (195)<br />
Severance charges (e) (102) — (201)<br />
Stock-based compensation (138) (164) (189)<br />
Other, net (f), (g) (281) (89) (180)<br />
Total unallocated, net (50) 4 (1,247)<br />
Total consolidated operating profit $ 5,436 $ 5,592 $ 4,505<br />
(a) FAS pension expense in 2015 and 2014 was less than in 2013 primarily due to the June 2014 plan amendments to certain of our<br />
defined benefit pension plans to freeze future retirement benefits, partially offset by the impact of using new longevity assumptions<br />
(Note 11).<br />
(b) The higher CAS pension cost primarily reflects the impact of phasing in CAS Harmonization.<br />
(c) We expect FAS/CAS pension income in 2016 of about $975 million as further discussed in “Critical Accounting Policies –<br />
Postretirement Benefit Plans” below.<br />
(d) We recognized non-cash goodwill impairment charges related to the Technical Services reporting unit within our MFC business<br />
segment in 2014 and 2013. For more information, see “Note 1 – Significant Accounting Policies” of our consolidated financial<br />
statements.<br />
(e) See “Consolidated Results of Operations – Restructuring Charges” for information on charges related to certain severance actions at<br />
our business segments. Severance charges for initiatives that are not significant are included in business segment operating profit.<br />
(f) Other, net in 2015 includes a non-cash asset impairment charge of approximately $90 million related to our decision to divest LMCFT<br />
in 2016. This charge was partially offset by a net deferred tax benefit of about $80 million, which is recorded in income tax expense.<br />
The net impact reduced net earnings by about $10 million.<br />
(g) Other, net in 2015 includes approximately $45 million of non-recoverable transaction costs associated with the acquisition of Sikorsky<br />
and the strategic review of our government IT and technical services businesses.<br />
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The following tables reflect the impacts of our program realignment on net sales and operating profit for each of our<br />
business segments (in millions):<br />
Prior to<br />
Realignment<br />
Year Ended December 31, 2015<br />
Government IT<br />
Reclassification<br />
Technical Svcs<br />
Reclassification<br />
As Adjusted<br />
Net sales<br />
Aeronautics $15,570 $ — $ — $15,570<br />
Information Systems & Global Solutions 7,458 (2,480) 618 5,596<br />
Missiles and Fire Control 7,366 63 (659) 6,770<br />
Mission Systems and Training 7,697 1,353 41 9,091<br />
Space Systems 8,041 1,064 — 9,105<br />
Total net sales $46,132 $ — $ — $46,132<br />
Operating profit<br />
Aeronautics $ 1,681 $ — $ — $ 1,681<br />
Information Systems & Global Solutions 628 (173) 53 508<br />
Missiles and Fire Control 1,332 5 (55) 1,282<br />
Mission Systems and Training 800 42 2 844<br />
Space Systems 1,045 126 — 1,171<br />
Total business segment operating profit 5,486 — — 5,486<br />
Unallocated items, net (50) — — (50)<br />
Total consolidated operating profit $ 5,436 $ — $ — $ 5,436<br />
Prior to<br />
Realignment<br />
Year Ended December 31, 2014<br />
Government IT<br />
Reclassification<br />
Technical Svcs<br />
Reclassification<br />
As Adjusted<br />
Net sales<br />
Aeronautics $14,920 $ — $ — $14,920<br />
Information Systems & Global Solutions 7,788 (2,810) 676 5,654<br />
Missiles and Fire Control 7,680 155 (743) 7,092<br />
Mission Systems and Training 7,147 1,518 67 8,732<br />
Space Systems 8,065 1,137 — 9,202<br />
Total net sales $45,600 $ — $ — $45,600<br />
Operating profit<br />
Aeronautics $ 1,649 $ — $ — $ 1,649<br />
Information Systems & Global Solutions 699 (259) 32 472<br />
Missiles and Fire Control 1,358 21 (35) 1,344<br />
Mission Systems and Training 843 90 3 936<br />
Space Systems 1,039 148 — 1,187<br />
Total business segment operating profit 5,588 — — 5,588<br />
Unallocated items, net 4 — — 4<br />
Total consolidated operating profit $ 5,592 $ — $ — $ 5,592<br />
41
Prior to<br />
Realignment<br />
Year Ended December 31, 2013<br />
Government IT<br />
Reclassification<br />
Technical Svcs<br />
Reclassification<br />
As Adjusted<br />
Net sales<br />
Aeronautics $14,123 $ — $ — $14,123<br />
Information Systems & Global Solutions 8,367 (3,248) 996 6,115<br />
Missiles and Fire Control 7,757 172 (1,134) 6,795<br />
Mission Systems and Training 7,153 1,746 138 9,037<br />
Space Systems 7,958 1,330 — 9,288<br />
Total net sales $45,358 $ — $ — $45,358<br />
Operating profit<br />
Aeronautics $ 1,612 $ — $ — $ 1,612<br />
Information Systems & Global Solutions 759 (316) 55 498<br />
Missiles and Fire Control 1,431 9 (61) 1,379<br />
Mission Systems and Training 905 154 6 1,065<br />
Space Systems 1,045 153 — 1,198<br />
Total business segment operating profit 5,752 — — 5,752<br />
Unallocated items, net (1,247) — — (1,247)<br />
Total consolidated operating profit $ 4,505 $ — $ — $ 4,505<br />
The following segment discussions also include information relating to backlog for each segment. Backlog was<br />
approximately $99.6 billion, $80.5 billion and $82.6 billion at December 31, 2015, 2014 and 2013. Backlog at December 31,<br />
2015 includes approximately $15.6 billion of Sikorsky backlog and $4.8 billion of backlog related to our IS&GS business<br />
segment, which we plan to divest in 2016. These amounts included both funded backlog (firm orders for which funding has<br />
been both authorized and appropriated by the customer – Congress in the case of U.S. Government agencies) and unfunded<br />
backlog (firm orders for which funding has not yet been appropriated). Backlog does not include unexercised options or task<br />
orders to be issued under indefinite-delivery, indefinite-quantity contracts. Funded backlog was approximately $70.7 billion<br />
at December 31, 2015.<br />
Management evaluates performance on our contracts by focusing on net sales and operating profit and not by type or<br />
amount of operating expense. Consequently, our discussion of business segment performance focuses on net sales and<br />
operating profit, consistent with our approach for managing the business. This approach is consistent throughout the life<br />
cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and<br />
monitors performance on our contracts in a similar manner through their completion.<br />
We regularly provide customers with reports of our costs as the contract progresses. The cost information in the reports<br />
is accumulated in a manner specified by the requirements of each contract. For example, cost data provided to a customer for<br />
a product would typically align to the subcomponents of that product (such as a wing-box on an aircraft) and for services<br />
would align to the type of work being performed (such as help-desk support). Our contracts generally are cost-based, which<br />
allows for the recovery of costs in the pricing of our products and services. Most of our contracts are bid and negotiated with<br />
our customers under circumstances in which we are required to disclose our estimated total costs to provide the product or<br />
service. This approach for negotiating contracts with our U.S. Government customers generally allows for the recovery of<br />
our costs. We also may enter into long-term supply contracts for certain materials or components to coincide with the<br />
production schedule of certain products and to ensure their availability at known unit prices.<br />
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract,<br />
we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the<br />
effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical<br />
requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number<br />
and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our<br />
industrial cooperation agreements required under certain contracts with international customers). The initial profit booking<br />
rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the<br />
initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract<br />
if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract which decreases the<br />
estimated total costs to complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs<br />
to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may<br />
affect the profit booking rate.<br />
42
We have a number of programs that are designated as classified by the U.S. Government which cannot be specifically<br />
described. The operating results of these classified programs are included in our consolidated and business segment results<br />
and are subjected to the same oversight and internal controls as our other programs.<br />
Our net sales are primarily derived from long-term contracts for products and services provided to the U.S. Government<br />
as well as FMS contracted through the U.S. Government. We account for these contracts, as well as product contracts with<br />
non-U.S. Government customers, using the percentage-of-completion method of accounting, which represent substantially all<br />
of our net sales. We derive our remaining net sales from contracts to provide services to non-U.S. Government customers,<br />
which we account for under the services method of accounting.<br />
Under the percentage-of-completion method of accounting, we record sales on contracts based upon our progress<br />
towards completion on a particular contract as well as our estimate of the profit to be earned at completion. Costreimbursable<br />
contracts provide for the payment of allowable costs plus a fee. For fixed-priced contracts, net sales and cost of<br />
sales are recognized as products are delivered or as costs are incurred. Due to the nature of the percentage-of-completion<br />
method of accounting, changes in our cost of sales are typically accompanied by a related change in our net sales.<br />
Changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to<br />
increases or decreases in sales or operating profit resulting from varying production activity levels, deliveries or service<br />
levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking<br />
rate for a particular contract.<br />
In addition, comparability of our segment sales, operating profit and operating margins may be impacted favorably or<br />
unfavorably by changes in profit booking rates on our contracts accounted for using the percentage-of-completion method of<br />
accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the<br />
estimated total costs that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract<br />
may deteriorate resulting in an increase in the estimated total costs to complete and a reduction in the profit booking rate.<br />
Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of<br />
such changes. Segment operating profit and margins may also be impacted favorably or unfavorably by other items.<br />
Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges,<br />
insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual<br />
matters; restructuring charges, except for significant severance actions as mentioned above which are excluded from segment<br />
operating results; reserves for disputes; asset impairments; and losses on sales of assets. Segment operating profit and items<br />
such as risk retirements, reductions of profit booking rates or other matters are presented net of state income taxes.<br />
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters,<br />
net of state income taxes, increased segment operating profit by approximately $1.9 billion, $1.8 billion and $2.1 billion for<br />
2015, 2014 and 2013. The increase in our consolidated net adjustments in 2015 compared to 2014 was primarily due to an<br />
increase in profit booking rate adjustments at our Space Systems, Aeronautics and IS&GS business segments, offset by a<br />
decrease in profit booking rate adjustments at our MST and MFC business segments. The decrease in our consolidated net<br />
adjustments in 2014 compared to 2013 was primarily due to a decrease in profit booking rate adjustments at our Aeronautics,<br />
MFC and MST business segments. The consolidated net adjustments for 2015 are inclusive of approximately $645 million in<br />
unfavorable items, which include reserves for performance matters on an international program at MST and on commercial<br />
satellite programs at Space Systems. The consolidated net adjustments for 2014 are inclusive of approximately $650 million<br />
in unfavorable items, which include reserves recorded on certain training and logistics solutions programs at MST and net<br />
warranty reserve adjustments for various programs (including JASSM and GMLRS) at MFC as described in the respective<br />
business segment’s results of operations below. The consolidated net adjustments for 2013 are inclusive of approximately<br />
$600 million in unfavorable items, which include significant profit reductions on the F-35 development contract and on the<br />
C-5 program.<br />
43
Aeronautics<br />
Our Aeronautics business segment is engaged in the research, design, development, manufacture, integration,<br />
sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air<br />
vehicles and related technologies. Aeronautics’ major programs include the F-35 Lightning II Joint Strike Fighter,<br />
C-130 Hercules, F-16 Fighting Falcon, C-5M Super Galaxy and F-22 Raptor. Aeronautics’ operating results included the<br />
following (in millions):<br />
2015 2014 2013<br />
Net sales $15,570 $14,920 $14,123<br />
Operating profit 1,681 1,649 1,612<br />
Operating margins 10.8% 11.1% 11.4%<br />
Backlog at year-end $31,800 $27,600 $28,000<br />
2015 compared to 2014<br />
Aeronautics’ net sales in 2015 increased $650 million, or 4%, compared to 2014. The increase was attributable to higher<br />
net sales of approximately $1.4 billion for F-35 production contracts due to increased volume on aircraft production and<br />
sustainment activities; and approximately $150 million for the C-5 program due to increased deliveries (nine aircraft<br />
delivered in 2015 compared to seven delivered in 2014). The increases were partially offset by lower net sales of<br />
approximately $350 million for the C-130 program due to fewer aircraft deliveries (21 aircraft delivered in 2015, compared<br />
to 24 delivered in 2014), lower sustainment activities and aircraft contract mix; approximately $200 million due to decreased<br />
volume and lower risk retirements on various programs; approximately $195 million for the F-16 program due to fewer<br />
deliveries (11 aircraft delivered in 2015, compared to 17 delivered in 2014); and approximately $190 million for the<br />
F-22 program as a result of decreased sustainment activities.<br />
Aeronautics’ operating profit in 2015 increased $32 million, or 2%, compared to 2014. Operating profit increased by<br />
approximately $240 million for F-35 production contracts due to increased volume and risk retirements; and approximately<br />
$40 million for the C-5 program due to increased risk retirements. These increases were offset by lower operating profit of<br />
approximately $90 million for the F-22 program due to lower risk retirements; approximately $70 million for the<br />
C-130 program as a result of the reasons stated above for lower net sales; and approximately $80 million due to decreased<br />
volume and risk retirements on various programs. Adjustments not related to volume, including net profit booking rate<br />
adjustments and other matters, were approximately $100 million higher in 2015 compared to 2014.<br />
2014 compared to 2013<br />
Aeronautics’ net sales increased $797 million, or 6%, in 2014 as compared to 2013. The increase was primarily<br />
attributable to higher net sales of approximately $790 million for F-35 production contracts due to increased volume and<br />
sustainment activities; about $55 million for the F-16 program due to increased deliveries (17 aircraft delivered in 2014<br />
compared to 13 delivered in 2013) partially offset by contract mix; and approximately $45 million for the F-22 program due<br />
to increased risk retirements. The increases were partially offset by lower net sales of approximately $55 million for the<br />
F-35 development contract due to decreased volume, partially offset by the absence in 2014 of the downward revision to the<br />
profit booking rate that occurred in 2013; and about $40 million for the C-130 program due to fewer deliveries (24 aircraft<br />
delivered in 2014 compared to 25 delivered in 2013) and decreased sustainment activities, partially offset by contract mix.<br />
Aeronautics’ operating profit increased $37 million, or 2%, in 2014 as compared to 2013. The increase was primarily<br />
attributable to higher operating profit of approximately $85 million for the F-35 development contract due to the absence in<br />
2014 of the downward revision to the profit booking rate that occurred in 2013; about $75 million for the F-22 program due<br />
to increased risk retirements; approximately $50 million for the C-130 program due to increased risk retirements and contract<br />
mix, partially offset by fewer deliveries; and about $25 million for the C-5 program due to the absence in 2014 of the<br />
downward revisions to the profit booking rate that occurred in 2013. The increases were partially offset by lower operating<br />
profit of approximately $130 million for the F-16 program due to decreased risk retirements, partially offset by increased<br />
deliveries; and about $70 million for sustainment activities due to decreased risk retirements and volume. Operating profit<br />
was comparable for F-35 production contracts as higher volume was offset by lower risk retirements. Adjustments not related<br />
to volume, including net profit booking rate adjustments and other matters, were approximately $105 million lower for 2014<br />
compared to 2013.<br />
44
Backlog<br />
Backlog increased in 2015 compared to 2014 primarily due to higher orders on F-35 and C-130 programs. Backlog<br />
decreased slightly in 2014 compared to 2013 primarily due to lower orders on F-16 and F-22 programs.<br />
Trends<br />
We expect Aeronautics’ 2016 net sales to increase in the mid-single digit percentage range as compared to 2015 due to<br />
increased volume on the F-35 and C-130 programs, partially offset by decreased volume on the F-16 program. Operating<br />
profit is also expected to increase in the low single-digit percentage range, driven by increased volume on the F-35 program<br />
offset by contract mix that results in a slight decrease in operating margins between years.<br />
Information Systems & Global Solutions<br />
Our IS&GS business segment provides advanced technology systems and expertise, integrated information technology<br />
solutions and management services across a broad spectrum of applications for civil, defense, intelligence and other<br />
government customers. IS&GS’ Technical Services business provides a comprehensive portfolio of technical and<br />
sustainment services. IS&GS has a portfolio of many smaller contracts as compared to our other business segments. IS&GS<br />
has been impacted by the continued downturn in certain federal agencies’ information technology budgets and increased<br />
re-competition on existing contracts coupled with the fragmentation of large contracts into multiple smaller contracts that<br />
are awarded primarily on the basis of price. IS&GS’ operating results included the following (in millions):<br />
2015 2014 2013<br />
Net sales $5,596 $5,654 $6,115<br />
Operating profit 508 472 498<br />
Operating margins 9.1% 8.3% 8.1%<br />
Backlog at year-end $4,800 $6,000 $6,300<br />
2015 compared to 2014<br />
IS&GS’ net sales decreased $58 million, or 1%, in 2015 as compared to 2014. The decrease was attributable to lower net<br />
sales of approximately $395 million as a result of key program completions, lower customer funding levels and increased<br />
competition, coupled with the fragmentation of existing large contracts into multiple smaller contracts that are awarded<br />
primarily on the basis of price when re-competed (including CMS-CITIC). These decreases were partially offset by higher<br />
net sales of approximately $230 million for businesses acquired in 2014; and approximately $110 million due to the start-up<br />
of new programs and growth in recently awarded programs.<br />
IS&GS’ operating profit increased $36 million, or 8%, in 2015 as compared to 2014. The increase was attributable to<br />
improved program performance and risk retirements, offset by decreased operating profit resulting from the activities<br />
mentioned above for net sales. Adjustments not related to volume, including net profit booking rate adjustments and other<br />
matters, were approximately $70 million higher in 2015 compared to 2014.<br />
2014 compared to 2013<br />
IS&GS’ net sales decreased $461 million, or 8%, in 2014 as compared to 2013. The decrease was primarily attributable<br />
to lower net sales of about $475 million due to the wind-down or completion of certain programs, driven by reductions in<br />
direct warfighter support (including JIEDDO); and approximately $320 million due to decreased volume in technical services<br />
programs reflecting market pressures. The decreases were offset by higher net sales of about $330 million due to the start-up<br />
of new programs, growth in recently awarded programs and integration of recently acquired companies.<br />
IS&GS’ operating profit decreased $26 million, or 5%, in 2014 as compared to 2013. The decrease was primarily<br />
attributable to the activities mentioned above for sales, partially offset by severance recoveries related to the restructuring<br />
announced in November 2013 of approximately $20 million in 2014. Adjustments not related to volume, including net profit<br />
booking rate adjustments, were comparable in 2014 and 2013.<br />
45
Backlog<br />
Backlog decreased in 2015 compared to 2014 primarily due to sales being recognized on several multi-year programs<br />
(such as HMSC, NISC III, CIOG and NSF ASC) related to prior year awards and a limited number of large new business<br />
awards. Backlog decreased in 2014 compared to 2013 primarily due to lower customer funding levels and declining activities<br />
on direct warfighter support programs impacted by defense budget reductions.<br />
Trends<br />
We expect IS&GS’ 2016 net sales to decline in the high-single digit percentage range as compared to 2015, primarily<br />
driven by key loss contracts in an increasingly competitive environment, along with volume contraction on the segment’s<br />
major contracts. Operating profit is expected to decline at a higher percentage range in 2016, as compared to net sales<br />
percentage declines, driven by higher margin program losses and re-compete programs awarded at lower margins.<br />
Accordingly, 2016 margins are expected to be lower than 2015 results.<br />
Missiles and Fire Control<br />
Our MFC business segment provides air and missile defense systems; tactical missiles and air-to-ground precision strike<br />
weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration<br />
services; manned and unmanned ground vehicles; and energy management solutions. MFC’s major programs include PAC-3,<br />
THAAD, Multiple Launch Rocket System, Hellfire, JASSM, Javelin, Apache, Sniper ® , Low Altitude Navigation and<br />
Targeting Infrared for Night (LANTIRN ® ) and SOF CLSS. MFC’s operating results included the following (in millions):<br />
2015 2014 2013<br />
Net sales $ 6,770 $ 7,092 $ 6,795<br />
Operating profit 1,282 1,344 1,379<br />
Operating margins 18.9% 19.0% 20.3%<br />
Backlog at year-end $15,500 $13,300 $14,300<br />
2015 compared to 2014<br />
MFC’s net sales in 2015 decreased $322 million, or 5%, compared to the same period in 2014. The decrease was<br />
attributable to lower net sales of approximately $345 million for air and missile defense programs due to fewer deliveries<br />
(primarily PAC-3) and lower volume (primarily THAAD); and approximately $85 million for tactical missile programs due<br />
to fewer deliveries (primarily Guided Multiple Launch Rocket System (GMLRS)) and Joint Air-to-Surface Standoff Missile,<br />
partially offset by increased deliveries for Hellfire. These decreases were partially offset by higher net sales of approximately<br />
$55 million for energy solutions programs due to increased volume.<br />
MFC’s operating profit in 2015 decreased $62 million, or 5%, compared to 2014. The decrease was attributable to lower<br />
operating profit of approximately $100 million for fire control programs due primarily to lower risk retirements (primarily<br />
LANTIRN and SNIPER); and approximately $65 million for tactical missile programs due to lower risk retirements<br />
(primarily Hellfire and GMLRS) and fewer deliveries. These decreases were partially offset by higher operating profit of<br />
approximately $75 million for air and missile defense programs due to increased risk retirements (primarily THAAD).<br />
Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately<br />
$60 million lower in 2015 compared to 2014.<br />
2014 compared to 2013<br />
MFC’s net sales increased $297 million, or 4%, in 2014 as compared to 2013. The increase was primarily attributable to<br />
higher net sales of approximately $180 million for air and missile defense programs primarily due to increased volume for<br />
THAAD; about $115 million for fire control programs due to increased deliveries (including Apache); and about<br />
$125 million for various other programs due to increased volume. These increases were partially offset by lower net sales of<br />
approximately $115 million for tactical missile programs due to fewer deliveries (primarily High Mobility Artillery Rocket<br />
System and Army Tactical Missile System).<br />
MFC’s operating profit decreased $35 million, or 3%, in 2014 as compared to 2013. The decrease was primarily<br />
attributable to lower operating profit of about $20 million for tactical missile programs due to net warranty reserve<br />
adjustments for various programs (including JASSM and GMLRS) and fewer deliveries; and approximately $45 million for<br />
various other programs due to lower risk retirements. The decreases were offset by higher operating profit of approximately<br />
$20 million for air and missile defense programs due to increased volume (primarily THAAD and PAC-3); and about<br />
46
$15 million for fire control programs due to increased deliveries (primarily Apache), partially offset by lower risk retirements<br />
(primarily Sniper ® ). Adjustments not related to volume, including net profit booking rate adjustments and other matters,<br />
were approximately $95 million lower for 2014 compared to 2013.<br />
Backlog<br />
Backlog increased in 2015 compared to 2014 primarily due to higher orders on PAC-3, LANTIRN/Sniper and certain<br />
tactical missile programs, partially offset by lower orders on THAAD. Backlog decreased in 2014 compared to 2013<br />
primarily due to lower orders on THAAD and fire control systems programs, partially offset by higher orders on certain<br />
tactical missile programs and PAC-3.<br />
Trends<br />
We expect MFC’s net sales to be flat or experience a slight decline in 2016 as compared to 2015. Operating profit is<br />
expected to decrease by approximately 20 percent, driven by contract mix and fewer risk retirements in 2016 compared to<br />
2015. Accordingly, operating profit margin is expected to decline from 2015 levels.<br />
Mission Systems and Training<br />
As previously described, on November 6, 2015, we acquired Sikorsky and aligned the Sikorsky business under our MST<br />
business segment. The results of the acquired Sikorsky business have been included in our financial results from the<br />
November 6, 2015 acquisition date through December 31, 2015. As a result, our consolidated operating results and MST<br />
business segment operating results for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.<br />
Our MST business segment provides design, manufacture, service and support for a variety of military and civil<br />
helicopters, ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft;<br />
sea and land-based missile defense systems; radar systems; the Littoral Combat Ship (LCS); simulation and training services;<br />
and unmanned systems and technologies. In addition, MST supports the needs of customers in cybersecurity and delivers<br />
communication and command and control capabilities through complex mission solutions for defense applications. MST’s<br />
major programs include Black Hawk and Seahawk helicopters, Aegis Combat System (Aegis), LCS, Space Fence, Advanced<br />
Hawkeye Radar System, and TPQ-53 Radar System. MST’s operating results included the following (in millions):<br />
2015 2014 2013<br />
Net sales $ 9,091 $ 8,732 $ 9,037<br />
Operating profit 844 936 1,065<br />
Operating margins 9.3% 10.7% 11.8%<br />
Backlog at year-end $30,100 $13,300 $12,600<br />
2015 compared to 2014<br />
MST’s net sales in 2015 increased $359 million, or 4%, compared to 2014. The increase was attributable to net sales of<br />
approximately $400 million from Sikorsky, net of adjustments required to account for the acquisition of this business in the<br />
fourth quarter of 2015; and approximately $220 million for integrated warfare systems and sensors programs, primarily due<br />
to the ramp-up of recently awarded programs (Space Fence). These increases were partially offset by lower net sales of<br />
approximately $150 million for undersea systems programs due to decreased volume as a result of in-theater force reductions<br />
(primarily Persistent Threat Detection System); and approximately $105 million for ship and aviation systems programs<br />
primarily due to decreased volume (Merlin Capability Sustainment Program).<br />
MST’s operating profit in 2015 decreased $92 million, or 10%, compared to 2014. Operating profit decreased by<br />
approximately $75 million due to performance matters on an international program; approximately $45 million for Sikorsky<br />
due primarily to intangible amortization and adjustments required to account for the acquisition of this business in the fourth<br />
quarter of 2015; and approximately $15 million for integrated warfare systems and sensors programs, primarily due to<br />
investments made in connection with a recently awarded next generation radar technology program, partially offset by higher<br />
risk retirements (including Halifax Class Modernization). These decreases were partially offset by approximately $20 million<br />
in increased operating profit for training and logistics services programs, primarily due to reserves recorded on certain<br />
programs in 2014 that were not repeated in 2015. Adjustments not related to volume, including net profit booking rate<br />
adjustments and other matters, were approximately $100 million lower in 2015 compared to 2014.<br />
47
2014 compared to 2013<br />
MST’s net sales decreased $305 million, or 3%, in 2014 as compared to 2013. Net sales decreased by approximately<br />
$305 million due to the wind-down or completion of certain C4ISR programs (primarily PTDS); about $85 million for<br />
undersea systems programs due to decreased volume and deliveries; and about $55 million related to the settlements of<br />
contract cost matters on certain programs in 2013 that were not repeated in 2014 (including a portion of the terminated<br />
presidential helicopter program). The decreases were partially offset by higher net sales of approximately $80 million for<br />
integrated warfare systems and sensors programs due to increased volume (primarily Space Fence); and approximately<br />
$40 million for training and logistics solutions programs due to increased deliveries (primarily Close Combat Tactical<br />
Trainer).<br />
MST’s operating profit decreased $129 million, or 12%, in 2014 as compared to 2013. The decrease was primarily<br />
attributable to lower operating profit of approximately $120 million related to the settlements of contract cost matters on<br />
certain programs in 2013 that were not repeated in 2014 (including a portion of the terminated presidential helicopter<br />
program); approximately $55 million due to the reasons described above for lower C4ISR program sales, as well as<br />
performance matters on an international program; and approximately $45 million due to higher reserves recorded on certain<br />
training and logistics solutions programs. The decreases were partially offset by higher operating profit of approximately<br />
$45 million for performance matters and reserves recorded in 2013 that were not repeated in 2014; and about $60 million for<br />
various programs due to increased risk retirements (including MH-60 and radar surveillance programs). Adjustments not<br />
related to volume, including net profit booking rate adjustments and other matters, were approximately $85 million lower for<br />
2014 compared to 2013.<br />
Backlog<br />
Backlog increased in 2015 compared to 2014 primarily due to the addition of Sikorsky backlog, as well as higher orders<br />
on new program starts (such as Australian Defence Force Pilot Training System). Backlog increased in 2014 compared to<br />
2013 primarily due to higher orders on new program starts (such as Space Fence).<br />
Trends<br />
We expect MST’s 2016 net sales to increase in the mid-double digit percentage range compared to 2015 net sales due to<br />
the inclusion of Sikorsky programs for a full year, partially offset by a decline in volume due to the wind-down or<br />
completion of certain programs. Operating profit is expected to be equivalent to 2015 on higher volume, and operating<br />
margin is expected to decline due to costs associated with the Sikorsky acquisition, including the impact of purchase<br />
accounting adjustments, integration costs and inherited restructuring costs associated with actions committed to by Sikorsky<br />
prior to acquisition.<br />
Space Systems<br />
Our Space Systems business segment is engaged in the research and development, design, engineering and production of<br />
satellites, strategic and defensive missile systems and space transportation systems. Space Systems provides network-enabled<br />
situational awareness and integrates complex global systems to help our customers gather, analyze, and securely distribute<br />
critical intelligence data. Space Systems is also responsible for various classified systems and services in support of vital<br />
national security systems. Space Systems’ major programs include the Trident II D5 Fleet Ballistic Missile (FBM), Orion,<br />
Space Based Infrared System (SBIRS), AEHF, GPS-III, Geostationary Operational Environmental Satellite R-Series<br />
(GOES-R), and MUOS. Operating profit for our Space Systems business segment includes our share of earnings for our<br />
investment in ULA, which provides expendable launch services to the U.S. Government. Space Systems’ operating results<br />
included the following (in millions):<br />
2015 2014 2013<br />
Net sales $ 9,105 $ 9,202 $ 9,288<br />
Operating profit 1,171 1,187 1,198<br />
Operating margins 12.9% 12.9% 12.9%<br />
Backlog at year-end $17,400 $20,300 $21,400<br />
2015 compared to 2014<br />
Space Systems’ net sales in 2015 decreased $97 million, or 1%, compared to 2014. The decrease was attributable to<br />
approximately $335 million lower net sales for government satellite programs due to decreased volume (primarily AEHF)<br />
and the wind-down or completion of mission solutions programs; and approximately $55 million for strategic missile and<br />
defense systems due to lower volume. These decreases were partially offset by higher net sales of approximately<br />
$235 million for businesses acquired in 2014; and approximately $75 million for the Orion program due to increased volume.<br />
48
Space Systems’ operating profit in 2015 decreased $16 million, or 1%, compared to 2014. Operating profit increased<br />
approximately $85 million for government satellite programs due primarily to increased risk retirements. This increase was<br />
offset by lower operating profit of approximately $65 million for commercial satellite programs due to performance matters<br />
on certain programs; and approximately $35 million due to decreased equity earnings in joint ventures. Adjustments not<br />
related to volume, including net profit booking rate adjustments and other matters, were approximately $105 million higher<br />
in 2015 compared to 2014.<br />
2014 compared to 2013<br />
Space Systems’ net sales decreased $86 million, or 1%, in 2014 as compared to 2013. The decrease was primarily<br />
attributable to lower net sales of approximately $335 million for government satellite programs due to decreased volume<br />
(primarily AEHF, GPS-III and MUOS); $190 million due to mission solutions’ programs transitioning from development to<br />
operations and support, wind-down or completion of certain programs, and defense budget cuts; and about $45 million for<br />
various other programs due to decreased volume. The decreases were partially offset by higher net sales of approximately<br />
$340 million for the Orion program due to increased volume (primarily the first unmanned test flight of the Orion MPCV);<br />
and about $145 million for commercial space transportation programs due to launch-related activities.<br />
Space Systems’ operating profit for 2014 was comparable to 2013. Operating profit decreased by approximately<br />
$20 million for government satellite programs due to lower volume (primarily AEHF and GPS-III), partially offset by<br />
increased risk retirements (primarily MUOS); and about $20 million due to decreased equity earnings for joint ventures. The<br />
decreases were offset by higher operating profit of approximately $30 million for the Orion program due to increased<br />
volume. Operating profit was reduced by approximately $40 million for charges, net of recoveries, related to the<br />
restructuring action announced in November 2013. Adjustments not related to volume, including net profit booking rate<br />
adjustments and other matters, were approximately $10 million lower for 2014 compared to 2013.<br />
Equity earnings<br />
Total equity earnings recognized by Space Systems (primarily ULA) represented approximately $245 million,<br />
$280 million and $300 million, or 21%, 24% and 25% of this business segment’s operating profit during 2015, 2014 and<br />
2013.<br />
Backlog<br />
Backlog decreased in 2015 compared to 2014 primarily due to lower orders for government satellite programs and the<br />
Orion program and higher sales on the Orion program. Backlog decreased in 2014 compared to 2013 primarily due to lower<br />
orders and higher sales on the Orion program, partially offset by higher orders on SBIRS.<br />
Trends<br />
We expect Space Systems’ 2016 net sales to decline in the mid-single digit percentage range as compared to 2015,<br />
primarily driven by program lifecycles on government satellite programs. Operating profit is expected to decline by<br />
approximately 10 percent, primarily driven by contract mix and slightly lower equity earnings in 2016 compared to 2015. As<br />
a result, operating profit margin is expected to decline slightly between the years.<br />
Liquidity and Cash Flows<br />
We have a balanced cash deployment strategy to enhance stockholder value and position ourselves to take advantage of<br />
new business opportunities when they arise. Consistent with that strategy, we have continued to invest in our business,<br />
including capital expenditures, independent research and development and made selective business acquisitions, while<br />
returning cash to stockholders through dividends and share repurchases, and managing our debt levels, maturities and interest<br />
rates.<br />
We have generated strong operating cash flows, which have been the primary source of funding for our operations,<br />
capital expenditures, debt service and repayments, dividends, share repurchases and postretirement benefit plan<br />
contributions. Our strong operating cash flows enabled our Board of Directors to approve two key cash deployment<br />
initiatives in September 2015. First, we increased our fourth quarter dividend rate by 10% to $1.65 per share. Second, the<br />
Board of Directors approved a $3.0 billion increase to our share repurchase program. Inclusive of this increase, the total<br />
remaining authorization for future common share repurchases under our program was $3.6 billion as of December 31, 2015.<br />
Further, based on a cash deployment initiative we announced in October 2014, we plan to reduce our total outstanding share<br />
count to below 300 million shares by the end of 2017, market conditions and our fiduciary obligations permitting. This plan<br />
was not affected by our acquisition of Sikorsky.<br />
49
We have accessed the capital markets opportunistically as we did in February 2015 when we issued $2.25 billion of<br />
long-term debt and as needed as we did in November 2015 when we issued $7.0 billion of long-term debt in connection with<br />
our acquisition of Sikorsky. We also used a combination of short-term debt financing, commercial paper and available cash<br />
to fund the Sikorsky acquisition, as discussed in “Capital Structure, Resources and Other” and “Note 10 – Debt” of our<br />
consolidated financial statements. We expect our cash from operations will continue to be sufficient to support our operations<br />
and anticipated capital expenditures for the foreseeable future. However, we expect to continue to issue commercial paper<br />
backed by our revolving credit facility to manage the timing of our cash flows. We expect to receive a tax-free special cash<br />
payment of approximately $1.8 billion as a result of the anticipated divestiture of our IS&GS business segment in the third or<br />
fourth quarter of 2016 that we intend to use to repay debt, pay dividends or repurchase stock, although the timing and closing<br />
of the transaction are uncertain and subject to obtaining Leidos stockholder and regulatory approvals and receipt of opinions<br />
of tax counsel. As described in the “Capital Structure, Resources and Other” section below, we have financing resources<br />
available to fund potential cash outflows that are less predictable or more discretionary, should they occur. We also have<br />
access to credit markets, if needed, for liquidity or general corporate purposes, including, but not limited to, our revolving<br />
credit facility or the ability to issue commercial paper, and letters of credit to support customer advance payments and for<br />
other trade finance purposes such as guaranteeing our performance on particular contracts.<br />
Cash received from customers, either from the payment of invoices for work performed or for advances in excess of<br />
costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by<br />
the customer. However, we may determine to fund customer programs ourselves pending government appropriations and are<br />
doing so with increased frequency. If we incur costs in excess of funds obligated on the contract, we may be at risk for<br />
reimbursement of the excess costs.<br />
Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.<br />
We generally bill and collect cash more frequently under cost-reimbursable and time-and-materials contracts, which together<br />
represent approximately half of the sales we recorded in 2015, as we are authorized to bill as the costs are incurred or work is<br />
performed. A number of our fixed-price contracts may provide for performance-based payments, which allow us to bill and<br />
collect cash as we perform on the contract. The amount of performance-based payments and the related milestones are<br />
encompassed in the negotiation of each contract. The timing of such payments may differ from our incurrence of costs<br />
related to our contract performance, thereby affecting our cash flows.<br />
The U.S. Government has indicated that it would consider progress payments as the baseline for negotiating payment<br />
terms on fixed-price contracts, rather than performance-based payments. In contrast to negotiated performance-based<br />
payment terms, progress payment provisions correspond to a percentage of the amount of costs incurred during the<br />
performance of the contract. While the total amount of cash collected on a contract is the same, performance-based payments<br />
have had a more favorable impact on the timing of our cash flows. In addition, our cash flows may be affected if the U.S.<br />
Government decides to withhold payments on our billings. While the impact of withholding payments delays the receipt of<br />
cash, the cumulative amount of cash collected during the life of the contract will not vary.<br />
The majority of our capital expenditures for 2015 and those planned for 2016 are for equipment, facilities infrastructure<br />
and information technology. Expenditures for equipment and facilities infrastructure are generally incurred to support new<br />
and existing programs across all of our business segments. For example, we have projects underway in our Aeronautics<br />
business segment for facilities and equipment to support higher production of the F-35 combat aircraft. In addition, we have<br />
projects underway to modernize certain of our facilities, inclusive of our efforts to consolidate and reduce leased facilities.<br />
We also incur capital expenditures for information technology to support programs and general enterprise information<br />
technology infrastructure, inclusive of costs for the development or purchase of internal-use software.<br />
50
The following table provides a summary of our cash flow information followed by a discussion of the key elements<br />
(in millions):<br />
2015 2014 2013<br />
Cash and cash equivalents at beginning of year $ 1,446 $ 2,617 $ 1,898<br />
Operating activities<br />
Net earnings 3,605 3,614 2,981<br />
Non-cash adjustments 821 876 1,570<br />
Changes in working capital (846) (372) (98)<br />
Other, net 1,521 (252) 93<br />
Net cash provided by operating activities 5,101 3,866 4,546<br />
Net cash used for investing activities (9,734) (1,723) (1,121)<br />
Net cash provided by (used for) financing activities 4,277 (3,314) (2,706)<br />
Net change in cash and cash equivalents (356) (1,171) 719<br />
Cash and cash equivalents at end of year $ 1,090 $ 1,446 $ 2,617<br />
Operating Activities<br />
2015 compared to 2014<br />
Net cash provided by operating activities increased $1.2 billion in 2015 compared to 2014 primarily due to lower<br />
pension contributions, partially offset by decreases in working capital and higher tax payments. The $1.8 billion increase in<br />
cash flows related to Other, net in the table above is primarily because we made no contributions to our heritage qualified<br />
defined benefit pension trust in 2015 compared to $2.0 billion in 2014. We made $5.0 million in contributions to our new<br />
Sikorsky bargained qualified defined benefit pension plan in 2015. The increase in cash flows related to Other, net was offset<br />
by higher federal and foreign income tax payments, net of refunds received, of approximately $210 million in 2015<br />
compared to 2014 due primarily to the absence of refunds received in 2015 (prior year’s tax refunds were attributable to<br />
timing of discretionary pension contributions made during the fourth quarter of the respective previous years). The<br />
$474 million decrease in cash flows related to working capital (defined as receivables and inventories less accounts payable<br />
and customer advances and amounts in excess of costs incurred) was attributable to an increase in receivables due to timing<br />
of customer collections (primarily F-35 contracts) as well as timing of production and billing cycles affecting customer<br />
advances and progress payments applied to inventories (primarily C-130 program). See “Critical Accounting Policies –<br />
Postretirement Benefit Plans” (under the caption “Funding Considerations”) for discussion of future postretirement benefit<br />
plan funding.<br />
2014 compared to 2013<br />
Net cash provided by operating activities decreased $680 million in 2014 compared to 2013 primarily due to higher tax<br />
payments, net of refunds received and increases in working capital. Our federal and foreign income tax payments, net of<br />
refunds received, were approximately $760 million higher in 2014 compared to 2013 due to an increase in net income and<br />
lower refunds received in 2014 (attributable to timing of discretionary pension contributions made during the fourth quarter<br />
of 2012). The decrease of $274 million in cash provided by working capital (defined as receivables and inventories less<br />
accounts payable and customer advances and amounts in excess of costs incurred) was primarily attributable to lower cash<br />
receipts related to accounts receivable, primarily timing on the F-35 production contracts (including amounts received in<br />
2013 from resolving U.S. Government contractual withholds that were not repeated in 2014). Partially offsetting the<br />
decreases in operating cash flows were lower pension contributions in 2014. We made $2.0 billion in contributions to our<br />
qualified defined benefit pension plans in 2014, compared to $2.25 billion in 2013.<br />
Investing Activities<br />
Net cash used for investing activities increased $8.0 billion and $602 million in 2015 and 2014, respectively, compared<br />
to the prior year, primarily due to increased acquisition activities. Acquisition activities include both the acquisition of<br />
businesses and investments in affiliates. We paid $9.0 billion in 2015 for the Sikorsky acquisition, net of cash acquired<br />
(Note 3). We paid $898 million in 2014 for acquisition activities, primarily related to the acquisitions of Zeta, Systems Made<br />
Simple, and Industrial Defender. In 2013, we paid $269 million for acquisition activities, primarily related to the acquisition<br />
of Amor Group.<br />
51
Capital expenditures amounted to $939 million in 2015, $845 million in 2014 and $836 million in 2013. The majority of<br />
our capital expenditures were for equipment and facilities infrastructure that generally are incurred to support new and<br />
existing programs across all of our business segments. We also incur capital expenditures for information technology to<br />
support programs and general enterprise information technology infrastructure, inclusive of costs for the development or<br />
purchase of internal-use-software.<br />
Additionally, in 2015, we received cash proceeds of approximately $165 million related to three properties sold in<br />
California.<br />
Financing Activities<br />
Net cash provided by financing activities increased $7.6 billion in 2015 compared to 2014 primarily due to proceeds<br />
from new debt issuances, partially offset by increased repurchases of common stock and higher dividends paid. Net cash<br />
used for financing activities increased $608 million in 2014 compared to 2013 primarily due to decreased proceeds from<br />
stock option exercises in 2014, higher dividends paid and increased repurchases of common stock, partially offset by the<br />
repayment of long-term notes in 2013.<br />
In February 2015, we received net proceeds of $2.21 billion for the issuance of $2.25 billion of fixed interest-rate longterm<br />
notes. In November 2015, we borrowed $7.0 billion of fixed interest-rate long-term notes and received net proceeds of<br />
$6.9 billion (the November 2015 Notes). These proceeds were used to repay $6.0 billion of outstanding borrowings under a<br />
364-day revolving credit facility that was used to finance a portion of the purchase price for the Sikorsky acquisition.<br />
Additionally, in the fourth quarter of 2015, to partially finance the Sikorsky acquisition we borrowed and repaid<br />
approximately $1.0 billion under our commercial paper program. See “Capital Structure, Resources and Other” for more<br />
information about our debt financing activities.<br />
We paid dividends totaling $1.9 billion ($6.15 per share) in 2015, $1.8 billion ($5.49 per share) in 2014 and $1.5 billion<br />
($4.78 per share) in 2013. We have increased our quarterly dividend rate in each of the last three years, including a<br />
10% increase in the quarterly dividend rate in the fourth quarter of 2015. We declared quarterly dividends of $1.50 per share<br />
during each of the first three quarters of 2015 and $1.65 per share during the fourth quarter of 2015; $1.33 per share during<br />
each of the first three quarters of 2014 and $1.50 per share during the fourth quarter of 2014; and $1.15 per share during each<br />
of the first three quarters of 2013 and $1.33 per share during the fourth quarter of 2013.<br />
We paid $3.1 billion, $1.9 billion and $1.8 billion to repurchase 15.2 million, 11.5 million and 16.2 million shares of our<br />
common stock during 2015, 2014 and 2013.<br />
Cash received from the issuance of our common stock in connection with employee stock option exercises during 2015,<br />
2014 and 2013 totaled $174 million, $308 million and $827 million. The exercises resulted in the issuance of 2.2 million<br />
shares, 3.7 million shares and 10.0 million shares of our common stock.<br />
In 2013, we repaid $150 million of long-term notes with a fixed interest rate of 7.38% due to their scheduled maturities.<br />
Capital Structure, Resources and Other<br />
At December 31, 2015, we held cash and cash equivalents of $1.1 billion. As of December 31, 2015, approximately<br />
$400 million of our cash and cash equivalents was held outside of the U.S. by foreign subsidiaries. Although those balances<br />
are generally available to fund ordinary business operations without legal or other restrictions, a significant portion is not<br />
immediately available to fund U.S. operations unless repatriated. Our intention is to permanently reinvest earnings from our<br />
foreign subsidiaries. While we do not intend to do so, if this cash had been repatriated at the end of 2015, we estimate that<br />
about $48 million of U.S. federal income tax would have been due after considering foreign tax credits.<br />
Our outstanding debt, net of unamortized discounts and deferred financing costs, amounted to $15.3 billion at<br />
December 31, 2015 and mainly is in the form of publicly-issued notes that bear interest at fixed rates. As of December 31,<br />
2015, we were in compliance with all covenants contained in our debt and credit agreements.<br />
We actively seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing<br />
costs to the extent practicable. We review changes in financial market and economic conditions to manage the types,<br />
amounts and maturities of our indebtedness. We may at times refinance existing indebtedness, vary our mix of variable-rate<br />
and fixed-rate debt or seek alternative financing sources for our cash and operational needs.<br />
52
Revolving Credit Facilities<br />
On October 9, 2015, we entered into a new $2.5 billion revolving credit facility (the 5-year Facility) with various banks<br />
and concurrently terminated our existing $1.5 billion revolving credit facility, which was scheduled to expire in August 2016.<br />
The 5-year Facility, which expires on October 9, 2020, is available for general corporate purposes. The undrawn portion of<br />
the 5-year Facility is also available to serve as a backup facility for the issuance of commercial paper. We may request and<br />
the banks may grant, at their discretion, an increase to the new credit facility up to an additional $500 million. There were no<br />
borrowings outstanding under the 5-year Facility as of and for the year ended December 31, 2015.<br />
In contemplation of our acquisition of Sikorsky, on October 9, 2015, we also entered into a 364-day revolving credit<br />
facility (the 364-day Facility, and together with the 5-year Facility, the Facilities) with various banks that provided<br />
$7.0 billion of funding for general corporate purposes, including the acquisition of Sikorsky. Concurrent with the<br />
consummation of the Sikorsky acquisition, we borrowed $6.0 billion under the 364-day Facility. On November 23, 2015, we<br />
repaid all outstanding borrowings under the 364-day Facility with proceeds received from the issuance of the November<br />
2015 Notes described below and terminated any remaining commitments of the lenders under the 364-day Facility.<br />
Borrowings under the Facilities are unsecured and bear interest at rates based, at our option, on a Eurodollar Rate or a<br />
Base Rate, as defined in the Facilities’ agreements. Each bank’s obligation to make loans under the 5-year Facility is subject<br />
to, among other things, our compliance with various representations, warranties and covenants, including covenants limiting<br />
our ability and certain of our subsidiaries’ ability to encumber assets and a covenant not to exceed a maximum leverage ratio,<br />
as defined in the 5-year Facility agreement.<br />
Long-Term Debt<br />
On November 23, 2015, we issued $7.0 billion of notes (the November 2015 Notes) in a registered public offering. We<br />
received net proceeds of $6.9 billion from the offering, after deducting discounts and debt issuance costs, which are being<br />
amortized as interest expense over the life of the debt. The November 2015 Notes consist of:<br />
• $750 million maturing in 2018 with a fixed interest rate of 1.85% (the 2018 Notes);<br />
• $1.25 billion maturing in 2020 with a fixed interest rate of 2.50% (the 2020 Notes);<br />
• $500 million maturing in 2023 with a fixed interest rate of 3.10% (the 2023 Notes);<br />
• $2.0 billion maturing in 2026 with a fixed interest rate of 3.55% (the 2026 Notes);<br />
• $500 million maturing in 2036 with a fixed interest rate of 4.50% (the 2036 Notes), and<br />
• $2.0 billion maturing in 2046 with a fixed interest rate of 4.70% (the 2046 Notes).<br />
We may, at our option, redeem some or all of the November 2015 Notes and unpaid interest at any time by paying the<br />
principal amount of notes being redeemed plus any make-whole premium and accrued and unpaid interest to the date of<br />
redemption. Interest is payable on the 2018 Notes and the 2020 Notes on May 23 and November 23 of each year, beginning<br />
on May 23, 2016; on the 2023 Notes and the 2026 Notes on January 15 and July 15 of each year, beginning on July 15, 2016;<br />
and on the 2036 Notes and the 2046 Notes on May 15 and November 15 of each year, beginning on May 15, 2016. The<br />
November 2015 Notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness.<br />
The proceeds of the November 2015 Notes were used to repay the $6.0 billion of borrowings under our 364-day Facility and<br />
for general Corporate purposes.<br />
On February 20, 2015, we issued $2.25 billion of notes (the February 2015 Notes) in a registered public offering. We<br />
received net proceeds of $2.21 billion from the offering, after deducting discounts and debt issuance costs, which are being<br />
amortized as interest expense over the life of the debt. The February 2015 Notes consist of $750 million maturing in 2025<br />
with a fixed interest rate of 2.90%, $500 million maturing in 2035 with a fixed interest rate of 3.60% and $1.0 billion<br />
maturing in 2045 with a fixed interest rate of 3.80%. We may, at our option, redeem some or all of the notes at any time by<br />
paying the principal amount of notes being redeemed plus any make-whole premium and accrued and unpaid interest to the<br />
date of redemption. Interest on the notes is payable on March 1 and September 1 of each year, beginning on September 1,<br />
2015. These notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness. The<br />
proceeds of the February 2015 Notes were used for general Corporate purposes.<br />
We also have an effective shelf registration statement on Form S-3 on file with the U.S. Securities and Exchange<br />
Commission to provide for the issuance of an indeterminate amount of debt securities.<br />
53
Commercial Paper<br />
We have agreements in place with financial institutions to provide for the issuance of commercial paper backed by our<br />
$2.5 billion credit facility. In connection with the Sikorsky acquisition, in the fourth quarter of 2015 we borrowed and repaid<br />
approximately $1.0 billion under our commercial paper program. There were no commercial paper borrowings outstanding<br />
as of December 31, 2015. However, we expect to continue to issue commercial paper backed by our credit facility to manage<br />
the timing of our cash flows.<br />
Stockholders’ Equity<br />
Our stockholders’ equity was $3.1 billion at December 31, 2015, a decrease of $303 million from December 31, 2014.<br />
The decrease was primarily due to the repurchase of 15.2 million common shares for $3.1 billion; and dividends declared of<br />
$1.9 billion during the year. These decreases were partially offset by net earnings of $3.6 billion; employee stock activity of<br />
$660 million (including the impacts of stock option exercises, ESOP activity and stock-based compensation); and the<br />
amortization of $850 million in 2015 postretirement benefit plan expense, offset by the re-measurements of our<br />
postretirement benefit plans of $351 million.<br />
As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with<br />
the excess purchase price over par value recorded as a reduction of additional paid-in capital. Due to the volume of<br />
repurchases made under our share repurchase program, additional paid-in capital was reduced to zero, with the remainder of<br />
the excess purchase price over par value of $2.4 billion recorded as a reduction of retained earnings in 2015.<br />
Contractual Commitments and Off-Balance Sheet Arrangements<br />
At December 31, 2015, we had contractual commitments to repay debt, make payments under operating leases, settle<br />
obligations related to agreements to purchase goods and services and settle tax and other liabilities. Capital lease obligations<br />
were not material. Payments due under these obligations and commitments are as follows (in millions):<br />
Total<br />
Less Than<br />
1 Year<br />
Payments Due By Period<br />
Years<br />
2 and 3<br />
Years<br />
4 and 5<br />
After<br />
5 Years<br />
Long-term debt (a) $16,181 $ 953 $ 750 $2,150 $12,328<br />
Interest payments 11,224 623 1,259 1,192 8,150<br />
Other liabilities 2,892 313 546 365 1,668<br />
Operating lease obligations 793 205 289 165 134<br />
Purchase obligations:<br />
Operating activities 40,455 18,492 15,700 4,792 1,471<br />
Capital expenditures 290 233 55 2 —<br />
Total contractual cash obligations $71,835 $20,819 $18,599 $8,666 $23,751<br />
(a)<br />
Long-term debt includes scheduled principal payments only and excludes $18 million of debt issued by a consolidated joint venture,<br />
for which the debt is not guaranteed by us.<br />
Amounts related to other liabilities represent the contractual obligations for certain long-term liabilities recorded as of<br />
December 31, 2015. Such amounts mainly include expected payments under non-qualified pension plans, environmental<br />
liabilities and deferred compensation plans.<br />
Purchase obligations related to operating activities include agreements and contracts that give the supplier recourse to us<br />
for cancellation or nonperformance under the contract or contain terms that would subject us to liquidated damages. Such<br />
agreements and contracts may, for example, be related to direct materials, obligations to subcontractors and outsourcing<br />
arrangements. Total purchase obligations for operating activities in the preceding table include approximately $36.7 billion<br />
related to contractual commitments entered into as a result of contracts we have with our U.S. Government customers. The<br />
U.S. Government generally would be required to pay us for any costs we incur relative to these commitments if they were to<br />
terminate the related contracts “for convenience” under the Federal Acquisition Regulation (FAR), subject to available<br />
funding. This also would be true in cases where we perform subcontract work for a prime contractor under a U.S.<br />
Government contract. The termination for convenience language also may be included in contracts with foreign, state and<br />
local governments. We also have contracts with customers that do not include termination for convenience provisions,<br />
including contracts with commercial customers.<br />
54
Purchase obligations in the preceding table for capital expenditures generally include facilities infrastructure, equipment<br />
and information technology.<br />
We also may enter into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to<br />
obtaining orders for our products and services from certain customers in foreign countries. These agreements are designed to<br />
enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the<br />
country. Offset agreements may be satisfied through activities that do not require us to use cash, including transferring<br />
technology, providing manufacturing and other consulting support to in-country projects and the purchase by third parties<br />
(e.g., our vendors) of supplies from in-country vendors. These agreements also may be satisfied through our use of cash for<br />
such activities as purchasing supplies from in-country vendors, providing financial support for in-country projects,<br />
establishment of ventures with local companies and building or leasing facilities for in-country operations. We typically do<br />
not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied<br />
against our offset agreements are based on negotiations with the customer and typically require cash outlays that represent<br />
only a fraction of the original amount in the offset agreement. The costs to satisfy our offset obligations are included in the<br />
estimates of our total costs to complete the contract and may impact our profitability and cash flows. The ability to recover<br />
investments that we make is generally dependent upon the successful operation of ventures that we do not control and may<br />
involve products and services that are dissimilar to our business activities. At December 31, 2015, the remaining obligations<br />
under our outstanding offset agreements totaled $16 billion, which primarily relate to our Aeronautics, MFC and MST<br />
business segments, most of which extend through 2028. To the extent we have entered into purchase obligations at<br />
December 31, 2015 that also satisfy offset agreements, those amounts are included in the preceding table. Offset programs<br />
usually extend over several years and may provide for penalties, estimated at approximately $1.4 billion at December 31,<br />
2015, in the event we fail to perform in accordance with offset requirements. While historically we have not been required to<br />
pay material penalties, resolution of offset requirements are often the result of negotiations and subjective judgments.<br />
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) are required to provide<br />
ULA an additional capital contribution if ULA is unable to make required payments under its inventory supply agreement<br />
with Boeing. As of December 31, 2015, ULA’s total remaining obligation to Boeing under the inventory supply agreement<br />
was $120 million. The parties have agreed to defer the remaining payment obligation as it is more than offset by other<br />
commitments to ULA. Accordingly, we do not expect to be required to make a capital contribution to ULA under this<br />
agreement.<br />
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance<br />
and financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its<br />
obligations, as it has done through December 31, 2015, and that it will not be necessary to make payments under the crossindemnities<br />
or guarantees.<br />
We have entered into standby letters of credit, surety bonds and third-party guarantees with financial institutions and<br />
other third parties primarily relating to advances received from customers and the guarantee of future performance on certain<br />
contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some<br />
cases, we may guarantee the contractual performance of third parties such as venture partners. At December 31, 2015, we<br />
had the following outstanding letters of credit, surety bonds and third-party guarantees (in millions):<br />
Total<br />
Commitment<br />
Commitment Expiration By Period<br />
Less Than<br />
1 Year<br />
Years<br />
2 and 3<br />
Years<br />
4 and 5<br />
After<br />
5 Years<br />
Standby letters of credit (a) $2,718 $1,374 $408 $811 $125<br />
Surety bonds 425 420 2 3 —<br />
Guarantees 678 21 14 130 513<br />
Total commitments $3,821 $1,815 $424 $944 $638<br />
(a) Approximately $1.1 billion of standby letters of credit in the “Less Than 1 Year” category, $93 million in the “Years 2 and 3”<br />
category and $724 million in the “Years 4 and 5” category are expected to renew for additional periods until completion of the<br />
contractual obligation.<br />
At December 31, 2015, third-party guarantees totaled $678 million, of which approximately 79% related to guarantees<br />
of contractual performance of ventures to which we currently are or previously were a party. This amount represents our<br />
estimate of the maximum amount we would expect to incur upon the contractual non-performance of the venture partners. In<br />
addition, we generally have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a<br />
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venture partner. We believe our current and former venture partners will be able to perform their obligations, as they have<br />
done through December 31, 2015, and that it will not be necessary to make payments under the guarantees. In determining<br />
our exposures, we evaluate the reputation, technical capabilities and credit quality of our current and former venture partners.<br />
Critical Accounting Policies<br />
Contract Accounting / Sales Recognition<br />
Substantially all of our net sales are accounted for using the percentage-of-completion method, which requires that<br />
significant estimates and assumptions be made in accounting for the contracts. Our remaining net sales are derived from<br />
contracts to provide services to non-U.S. Government customers, which we account for under a services accounting model.<br />
We evaluate new or significantly modified contracts with customers other than the U.S. Government, to the extent the<br />
contracts include multiple elements, to determine if the individual deliverables should be accounted for as separate units of<br />
accounting. When we determine that accounting for the deliverables as separate units is appropriate, we allocate the contract<br />
value to the deliverables based on their relative estimated selling prices. The contracts or contract modifications we evaluate<br />
for multiple elements typically are long-term in nature and include the provision of both products and services. Based on the<br />
nature of our business, we generally account for components of such contracts using the percentage-of-completion<br />
accounting model or the services accounting model, as appropriate.<br />
We classify net sales as products or services on our Statements of Earnings based on the predominant attributes of the<br />
underlying contract. Most of our long-term contracts are denominated in U.S. dollars, including contracts for sales of military<br />
products and services to international governments contracted through the U.S. Government. We record sales for both<br />
products and services under cost-reimbursable, fixed-price and time-and-materials contracts.<br />
Contract Types<br />
Cost-reimbursable contracts<br />
Cost-reimbursable contracts, which accounted for about 43%, 40%, and 45% of our total net sales in 2015, 2014, and<br />
2013, provide for the payment of allowable costs incurred during performance of the contract plus a fee, up to a ceiling based<br />
on the amount that has been funded. We generate revenue under two general types of cost-reimbursable contracts: cost-plusaward-fee/incentive-fee<br />
contracts, which represent a substantial majority of our cost-reimbursable contracts; and cost-plusfixed-fee<br />
contracts.<br />
Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s<br />
assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and<br />
schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee which is adjusted by a<br />
formula based on the relationship of total allowable costs to total target costs (incentive based on cost) or reimbursement of<br />
costs plus an incentive to exceed stated performance targets (incentive based on performance). The fixed fee in a cost-plusfixed-fee<br />
contract is negotiated at the inception of the contract and that fixed fee does not vary with actual costs.<br />
Fixed-price and other contracts<br />
Under fixed-price contracts, which accounted for about 54%, 55%, and 50% of our total net sales in 2015, 2014, and<br />
2013, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the<br />
estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price<br />
contracts have a performance-based component under which we may earn incentive payments or incur financial penalties<br />
based on our performance.<br />
Under time-and-materials contracts, which accounted for about 3% of our total net sales in 2015 and 5% of our total net<br />
sales in 2014 and 2013, we are paid a fixed hourly rate for each direct labor hour expended and we are reimbursed for<br />
allowable material costs and allowable out-of-pocket expenses. To the extent our actual direct labor and associated costs vary<br />
in relation to the fixed hourly billing rates provided in the contract, we will generate more or less profit or could incur a loss.<br />
Percentage-of-Completion Method<br />
We record net sales and an estimated profit on a percentage-of-completion basis for cost-reimbursable and fixed-price<br />
contracts for product and services contracts with the U.S. Government.<br />
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The percentage-of-completion method for product contracts depends on the nature of the products provided under the<br />
contract. For example, for contracts that require us to perform a significant level of development effort in comparison to the<br />
total value of the contract and/or to deliver minimal quantities, sales are recorded using the cost-to-cost method to measure<br />
progress toward completion. Under the cost-to-cost method, we recognize sales and an estimated profit as costs are incurred<br />
based on the proportion that the incurred costs bear to total estimated costs. For contracts that require us to provide a<br />
substantial number of similar items without a significant level of development, we record sales and an estimated profit on a<br />
percentage-of-completion basis using units-of-delivery as the basis to measure progress toward completing the contract. For<br />
contracts to provide services to the U.S. Government, sales are generally recorded using the cost-to-cost method.<br />
Award and incentive fees, as well as penalties related to contract performance, are considered in estimating sales and<br />
profit rates on contracts accounted for under the percentage-of-completion method. Estimates of award fees are based on past<br />
experience and anticipated performance. We record incentives or penalties when there is sufficient information to assess<br />
anticipated contract performance. Incentive provisions that increase or decrease earnings based solely on a single significant<br />
event are not recognized until the event occurs.<br />
Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks,<br />
estimating contract sales and costs (including estimating award and incentive fees and penalties related to performance) and<br />
making assumptions for schedule and technical issues. Due to the number of years it may take to complete many of our<br />
contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and<br />
costs at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in<br />
estimated total contract sales or estimated total costs are required, any changes from prior estimates are recognized in the<br />
current period for the inception-to-date effect of such changes.<br />
Our estimates of costs at completion of the contract are based on assumptions we make for variables such as labor<br />
productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to<br />
complete the contract (to estimate increases in wages and prices for materials), performance by our subcontractors and the<br />
availability and timing of funding from our customer, among other variables. When estimates of total costs to be incurred on<br />
a contract exceed total estimates of sales to be earned, a provision for the entire loss on the contract is recorded in the period<br />
in which the loss is determined.<br />
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract,<br />
we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the<br />
effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical<br />
requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number<br />
and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our<br />
industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with<br />
international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the<br />
technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates<br />
may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and<br />
cost aspects of the contract which decreases the estimated total costs to complete the contract. Conversely, our profit booking<br />
rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change<br />
during the performance of the contract and may affect the profit booking rate.<br />
In addition, comparability of our segment sales, operating profit and operating margins may be impacted favorably or<br />
unfavorably by changes in profit booking rates on our contracts accounted for using the percentage-of-completion method of<br />
accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the<br />
estimated total costs that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract<br />
may deteriorate resulting in an increase in the estimated total costs to complete and a reduction in the profit booking rate.<br />
Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of<br />
such changes. Segment operating profit and margins may also be impacted favorably or unfavorably by other items.<br />
Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges,<br />
insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual<br />
matters; restructuring charges, except for significant severance actions as mentioned above which are excluded from segment<br />
operating results; reserves for disputes; asset impairments; and losses on sales of assets. Segment operating profit and items<br />
such as risk retirements, reductions of profit booking rates or other matters are presented net of state income taxes.<br />
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Services Method<br />
Under a fixed-price service contract, we are paid a predetermined fixed amount for a specified scope of work and<br />
generally have full responsibility for the costs associated with the contract and the resulting profit or loss. We record net<br />
sales under fixed-price service contracts to non-U.S. Government customers on a straight-line basis over the period of<br />
contract performance, unless evidence suggests that net sales are earned or the obligations are fulfilled in a different pattern.<br />
For cost-reimbursable contracts for services to non-U.S. Government customers that provide for award and incentive fees, we<br />
record net sales as services are performed, exclusive of award and incentive fees. Award and incentive fees are recorded<br />
when they are fixed or determinable, generally at the date the amount is communicated to us by the customer. This approach<br />
results in the recognition of such fees at contractual intervals (typically every six months) throughout the contract and is<br />
dependent on the customer’s processes for notification of awards and issuance of formal notifications. Costs for all service<br />
contracts are expensed as incurred.<br />
Other Contract Accounting Considerations<br />
The majority of our sales are driven by pricing based on costs incurred to produce products or perform services under<br />
contracts with the U.S. Government. Cost-based pricing is determined under the FAR. The FAR provides guidance on the<br />
types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts. For example,<br />
costs such as those related to charitable contributions, interest expense and certain advertising and public relations activities<br />
are unallowable and, therefore, not recoverable through sales. In addition, we may enter into advance agreements with the<br />
U.S. Government that address the subjects of allowability and allocability of costs to contracts for specific matters. For<br />
example, most of the environmental costs we incur for environmental remediation related to sites operated in prior years are<br />
allocated to our current operations as general and administrative costs under FAR provisions and supporting advance<br />
agreements reached with the U.S. Government.<br />
We closely monitor compliance with and the consistent application of our critical accounting policies related to contract<br />
accounting. Costs incurred and allocated to contracts are reviewed for compliance with U.S. Government regulations by our<br />
personnel and are subject to audit by the Defense Contract Audit Agency.<br />
Postretirement Benefit Plans<br />
Overview<br />
Many of our employees participate in qualified and nonqualified defined benefit pension plans, retiree medical and life<br />
insurance plans and other postemployment plans (collectively, postretirement benefit plans – see Note 11). The majority of<br />
our accrued benefit obligations relate to our qualified defined benefit pension plans and retiree medical and life insurance<br />
plans. We recognize on a plan-by-plan basis the net funded status of these postretirement benefit plans under GAAP as either<br />
an asset or a liability on our Balance Sheets. There is a corresponding non-cash adjustment to accumulated other<br />
comprehensive loss, net of tax benefits recorded as deferred tax assets, in stockholders’ equity. The GAAP funded status<br />
represents the difference between the fair value of each plan’s assets and the benefit obligation of the plan. The GAAP<br />
benefit obligation represents the present value of the estimated future benefits we currently expect to pay to plan participants<br />
based on past service.<br />
In June 2014, we amended certain of our qualified and nonqualified defined benefit pension plans for non-union<br />
employees to freeze future retirement benefits. The freeze will take effect in two stages. Beginning on January 1, 2016, the<br />
pay-based component of the formula used to determine retirement benefits was frozen so that future pay increases, annual<br />
incentive bonuses or other amounts earned for or related to periods after December 31, 2015 will not be used to calculate<br />
retirement benefits. On January 1, 2020, the service-based component of the formula used to determine retirement benefits<br />
will also be frozen so that participants will no longer earn further credited service for any period after December 31, 2019.<br />
When the freeze is complete, the majority of our salaried employees will have transitioned to an enhanced defined<br />
contribution retirement savings plan.<br />
Notwithstanding these actions, the impact of these plans and benefits on our earnings may be volatile in that the amount<br />
of expense we record and the funded status for our postretirement benefit plans may materially change from year to year<br />
because those calculations are sensitive to funding levels as well as changes in several key economic assumptions, including<br />
interest rates, actual rates of return on plan assets and other actuarial assumptions including participant longevity and<br />
employee turnover, as well as the timing of cash funding.<br />
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Actuarial Assumptions<br />
The plan assets and benefit obligations are measured at the end of each year or more frequently, upon the occurrence of<br />
certain events such as a significant plan amendment, settlement or curtailment. The amounts we record are measured using<br />
actuarial valuations, which are dependent upon key assumptions such as discount rates, employee turnover, participant<br />
longevity, the expected long-term rate of return on plan assets and the health care cost trend rates for our retiree medical<br />
plans. The assumptions we make affect both the calculation of the benefit obligations as of the measurement date and the<br />
calculation of net periodic benefit cost in subsequent periods. When reassessing these assumptions we consider past and<br />
current market conditions and make judgments about future market trends. We also consider factors such as the timing and<br />
amounts of expected contributions to the plans and benefit payments to plan participants.<br />
We utilized a discount rate of 4.375% when calculating our benefit obligations related to our defined benefit pension<br />
plans at December 31, 2015, compared to 4.00% at December 31, 2014 and 4.75% at December 31, 2013. We utilized a<br />
discount rate of 4.25% when calculating our benefit obligations related to our retiree medical plans at December 31, 2015,<br />
compared to 3.75% at December 31, 2014 and 4.50% at December 31, 2013. We evaluate several data points in order to<br />
arrive at an appropriate discount rate, including results from cash flow models, quoted rates from long-term bond indices and<br />
changes in long-term bond rates over the past year. As part of our evaluation, we calculate the approximate average yields on<br />
corporate bonds rated AA or better selected to match our projected postretirement benefit plan cash flows.<br />
We utilized an expected long-term rate of return on plan assets of 8.00% at December 31, 2015, consistent with the rate<br />
used at December 31, 2014 and December 31, 2013. The long-term rate of return assumption represents the expected longterm<br />
rate of return on the funds invested or to be invested, to provide for the benefits included in the benefit obligations. This<br />
assumption is based on several factors including historical market index returns, the anticipated long-term allocation of plan<br />
assets, the historical return data for the trust funds, plan expenses and the potential to outperform market index returns. The<br />
difference between the long-term rate of return on plan assets assumption we select and the actual return on plan assets in any<br />
given year affects both the funded status of our benefit plans and the calculation of FAS pension expense in subsequent<br />
periods. Although the actual return in any specific year likely will differ from the assumption, the average expected return<br />
over a long-term future horizon should be approximately equal to the assumption. As a result, changes in this assumption are<br />
less frequent than changes in the discount rate.<br />
Our stockholders’ equity has been reduced cumulatively by $11.3 billion from the annual year-end measurements of the<br />
funded status of postretirement benefit plans. The cumulative non-cash, after-tax reduction primarily represents net actuarial<br />
losses resulting from declines in discount rates from 6.375% at the end of 2007 to 4.375% at the end of 2015 and investment<br />
losses incurred during 2008 and 2015, which will be amortized to expense over the average future service period of<br />
employees expected to receive benefits under the plans of approximately 10 years as of December 31, 2015. During 2015,<br />
$850 million of these amounts was recognized as a component of postretirement benefit plans expense and about<br />
$693 million is expected to be recognized as expense in 2016.<br />
The discount rate and long-term rate of return on plan assets assumptions we select at the end of each year are based on<br />
our best estimates and judgment. A change of plus or minus 25 basis points in the 4.375% discount rate assumption at<br />
December 31, 2015, with all other assumptions held constant, would have decreased or increased the amount of the qualified<br />
pension benefit obligation we recorded at the end of 2015 by approximately $1.5 billion, which would result in an after-tax<br />
increase or decrease in stockholders’ equity at the end of the year of approximately $1.0 billion. If the 4.375% discount rate<br />
at December 31, 2015 that was used to compute the expected 2016 FAS pension expense for our qualified defined benefit<br />
pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of FAS pension<br />
expense projected for 2016 would be lower or higher by approximately $120 million. If the 8.00% expected long-term rate of<br />
return on plan assets assumption at December 31, 2015 that was used to compute the expected 2016 FAS pension expense for<br />
our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held<br />
constant, the amount of FAS pension expense projected for 2016 would be lower or higher by approximately $85 million.<br />
Funding Considerations<br />
We made contributions related to our qualified defined benefit pension plans of $2.0 billion in 2014 and $2.25 billion in<br />
2013 inclusive of amounts in excess of our required contributions. We made $5 million in contributions to our new Sikorsky<br />
bargained qualified defined benefit pension plan in 2015. Funding of our qualified defined benefit pension plans is<br />
determined in a manner consistent with CAS and in accordance with the Employee Retirement Income Security Act of 1974<br />
(ERISA), as amended by the Pension Protection Act of 2006 (PPA). Our goal has been to fund the pension plans to a level of<br />
at least 80%, as determined under the PPA. This ERISA funded status is calculated on a different basis than under GAAP. In<br />
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July 2012, the U.S. Government passed the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21), which<br />
included a provision that changed the methodology for calculating the interest rate assumption used in determining the<br />
minimum funding requirements under the PPA. As a result of MAP-21 there was an increase in the interest rate assumption,<br />
which in turn lowered the minimum funding requirements. The impact of MAP-21 decreased each year and was scheduled to<br />
phase out by 2016. On August 8, 2014, the Highway and Transportation Funding Act of 2014 (HATFA) was enacted; and on<br />
November 2, 2015, the Bipartisan Budget Act of 2015; which extend the methodology put in place by MAP-21 to calculate<br />
the interest rate assumption so that the impact will begin to decrease in 2021 and phase out by 2024. This has the effect of<br />
lowering our minimum funding requirements during the affected periods from what they otherwise would have been had the<br />
legislation not been enacted. The ERISA funded status of our qualified defined benefit pension plans was about 90% and<br />
92% as of December 31, 2015 and 2014. The GAAP funded status of our qualified defined benefit pension plans was about<br />
73% and 76% funded at December 31, 2015 and 2014.<br />
Contributions to our defined benefit pension plans are recovered over time through the pricing of our products and<br />
services on U.S. Government contracts, including FMS, and are recognized in our cost of sales and net sales. CAS govern the<br />
extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government, including FMS.<br />
We recovered $1.6 billion in 2015 and $1.5 billion in both 2014 and 2013 as CAS pension costs. Effective February 27,<br />
2012, CAS rules were revised to better align the recovery of pension costs, including prepayment credits, on U.S.<br />
Government contracts with the minimum funding requirements of the PPA (referred to as CAS Harmonization). Specifically,<br />
CAS Harmonization shortened the amortization period for allocating gains and losses to U.S. Government contracts from 15<br />
to 10 years and requires the use of an interest rate to determine CAS pension cost consistent with the interest rate used to<br />
determine minimum pension funding requirements under the PPA. While the change in the amortization period was<br />
applicable beginning in 2013, there is a transition period for the impact of the change in the CAS liability measurement due<br />
to the revised interest rate that will be phased in with the full impact occurring in 2017. We expect the incremental impact of<br />
CAS Harmonization will increase successively through 2017, primarily due to the liability measurement transition period<br />
included in the amended rule. The enactment of the HATFA and Bipartisan Budget Act of 2015 also increased the interest<br />
rate assumption used to determine our CAS pension costs, which has the effect of lowering the recovery of pension<br />
contributions during the affected periods as it decreases our CAS pension costs.<br />
Pension cost recoveries under CAS occur in different periods from when pension contributions are made under the PPA.<br />
Amounts contributed in excess of the CAS pension costs recovered under U.S. Government contracts are considered to be<br />
prepayment credits under the CAS rules. As of December 31, 2015, our prepayment credits were approximately $9.0 billion<br />
as compared to $10.8 billion at December 31, 2014. The prepayment balance will increase or decrease based on our actual<br />
investment return on plan assets.<br />
Trends<br />
We do not plan to make contributions to our heritage pension plans in 2016 or 2017 because none are required using<br />
current assumptions, including anticipated investment returns on plan assets. However, we do plan to make contributions of<br />
approximately $25 million in 2016 and about $35 million in 2017 to our new Sikorsky bargained qualified defined benefit<br />
pension plan. We anticipate recovering approximately $2.0 billion of CAS pension cost in 2016 with a higher CAS recovery<br />
projected in 2017. Since the annual amount of CAS cost is more than our planned cash funding in each of these years, we<br />
will recover a portion of the $9.0 billion of prepayment credits existing at December 31, 2015.<br />
We expect our 2016 FAS pension expense to be $1.0 billion, which is comparable to our 2015 FAS pension expense of<br />
$1.1 billion. Also, we expect FAS/CAS pension income in 2016 of about $975 million, as compared to FAS/CAS pension<br />
income of $471 million in 2015, primarily due to higher CAS pension costs due to CAS Harmonization.<br />
Environmental Matters<br />
We are a party to various agreements, proceedings and potential proceedings for environmental cleanup issues, including<br />
matters at various sites where we have been designated a potentially responsible party (PRP). At December 31, 2015 and<br />
2014, the total amount of liabilities recorded on our Balance Sheet for environmental matters was $1.0 billion and<br />
$965 million. We have recorded receivables totaling $858 million and $836 million at December 31, 2015 and 2014 for the<br />
portion of environmental costs that are probable of future recovery in pricing of our products and services for agencies of the<br />
U.S. Government, as discussed below. The amount that is expected to be allocated to our non-U.S. Government contracts or<br />
that is determined to not be recoverable under U.S. Government contracts has been expensed through cost of sales. We<br />
project costs and recovery of costs over approximately 20 years. Our acquisition of Sikorsky included certain environmental<br />
remediation liabilities that are among those recorded on our Balance Sheet, along with the related receivables for probable<br />
future recovery. These amounts did not materially impact our consolidated financial statements.<br />
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We enter into agreements (e.g., administrative orders, consent decrees) that document the extent and timing of our<br />
environmental remediation obligation. We also are involved in remediation activities at environmental sites where formal<br />
agreements either do not exist or do not quantify the extent and timing of our obligation. Environmental cleanup activities<br />
usually span many years, which makes estimating the costs more judgmental due to, for example, changing remediation<br />
technologies. To determine the costs related to cleanup sites, we have to assess the extent of contamination, effects on natural<br />
resources, the appropriate technology to be used to accomplish the remediation and evolving governmental environmental<br />
standards.<br />
We perform quarterly reviews of environmental remediation sites and record liabilities and receivables in the period it<br />
becomes probable that a liability has been incurred and the amounts can be reasonably estimated (see the discussion under<br />
“Environmental Matters” in “Note 1 – Significant Accounting Policies” and “Note 14 – Legal Proceedings, Commitments<br />
and Contingencies” to our consolidated financial statements). We consider the above factors in our quarterly estimates of the<br />
timing and amount of any future costs that may be required for remediation activities, which results in the calculation of a<br />
range of estimates for a particular environmental site. We do not discount the recorded liabilities, as the amount and timing<br />
of future cash payments are not fixed or cannot be reliably determined. Given the required level of judgment and estimation,<br />
it is likely that materially different amounts could be recorded if different assumptions were used or if circumstances were to<br />
change (e.g., a change in environmental standards or a change in our estimate of the extent of contamination).<br />
On July 1, 2014, a regulation became effective in California setting the maximum level of the contaminant hexavalent<br />
chromium in drinking water at 10 parts per billion (ppb). In May 2014, the California Manufacturers and Technology<br />
Association filed a suit alleging the 10 ppb threshold is lower than is required to protect public health and thus imposes<br />
unjustified costs on the regulated community. We cannot predict the outcome of this suit or whether other challenges may be<br />
advanced by the regulated community or environmental groups which had sought a significantly higher and lower standard,<br />
respectively. If the new standard remains at 10 ppb, it will not have a material impact on our existing remediation costs in<br />
California. In addition, California is reevaluating its existing drinking water standard with respect to a second contaminant,<br />
perchlorate, and the U.S. Environmental Protection Agency (U.S. EPA) is also considering whether to regulate perchlorate<br />
and hexavalent chromium in drinking water. In February 2016, the Natural Resources Defense Council filed suit in federal<br />
court in New York against the U.S. EPA to compel the U.S. EPA to set an enforceable drinking water standard for<br />
perchlorate. If substantially lower standards are adopted, in either California or at the federal level, for perchlorate or, if the<br />
U.S. EPA were to adopt a standard for hexavalent chromium lower than 10 ppb, we expect a material increase in our<br />
estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future<br />
recovery in the pricing of our products and services for the U.S. Government. The amount that would be allocable to our non-<br />
U.S. Government contracts or that is determined to not be recoverable under U.S. Government contracts would be expensed,<br />
which may have a material effect on our earnings in any particular interim reporting period.<br />
Under agreements reached with the U.S. Government, most of the amounts we spend for environmental remediation are<br />
allocated to our operations as general and administrative costs. Under existing government regulations, these and other<br />
environmental expenditures relating to our U.S. Government business, after deducting any recoveries received from<br />
insurance or other PRPs, are allowable in establishing prices of our products and services. As a result, most of the<br />
expenditures we incur are included in our net sales and cost of sales according to U.S. Government agreement or regulation,<br />
regardless of the contract form (e.g. cost-reimbursable, fixed-price). We continually evaluate the recoverability of our<br />
environmental receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business<br />
base and contract mix and our history of receiving reimbursement of such costs.<br />
As disclosed above, we may record changes in the amount of environmental remediation liabilities as a result of our<br />
quarterly reviews of the status of our environmental remediation sites, which would result in a change to the corresponding<br />
environmental receivable and a charge to earnings. For example, if we were to determine that the liabilities should be<br />
increased by $100 million, the corresponding receivables would be increased by approximately $87 million, with the<br />
remainder recorded as a charge to earnings. This allocation is determined annually, based upon our existing and projected<br />
business activities with the U.S. Government.<br />
We reasonably cannot determine the extent of our financial exposure at all environmental sites with which we are<br />
involved. There are a number of former operating facilities we are monitoring or investigating for potential future<br />
remediation. In some cases, although a loss may be probable, it is not possible at this time to reasonably estimate the amount<br />
of any obligation for remediation activities because of uncertainties (e.g., assessing the extent of the contamination). During<br />
any particular quarter, such uncertainties may be resolved, allowing us to estimate and recognize the initial liability to<br />
remediate a particular former operating site. The amount of the liability could be material. Upon recognition of the liability, a<br />
portion will be recognized as a receivable with the remainder charged to earnings which may have a material effect in any<br />
particular interim reporting period.<br />
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If we are ultimately found to have liability at those sites where we have been designated a PRP, we expect that the actual<br />
costs of remediation will be shared with other liable PRPs. Generally, PRPs that are ultimately determined to be responsible<br />
parties are strictly liable for site cleanup and usually agree among themselves to share, on an allocated basis, the costs and<br />
expenses for investigation and remediation. Under existing environmental laws, responsible parties are jointly and severally<br />
liable and, therefore, we are potentially liable for the full cost of funding such remediation. In the unlikely event that we were<br />
required to fund the entire cost of such remediation, the statutory framework provides that we may pursue rights of cost<br />
recovery or contribution from the other PRPs. The amounts we record do not reflect the fact that we may recover some of the<br />
environmental costs we have incurred through insurance or from other PRPs, which we are required to pursue by agreement<br />
and U.S. Government regulation.<br />
Goodwill<br />
The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their<br />
estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying<br />
identifiable net assets of acquired businesses.<br />
Our goodwill balances were $13.6 billion and $10.9 billion at December 31, 2015 and 2014. During 2015, our goodwill<br />
balance increased $2.7 billion, primarily as a result of $2.8 billion in preliminary goodwill recorded in connection with the<br />
Sikorsky acquisition. We perform an impairment test of our goodwill at least annually in the fourth quarter or more<br />
frequently whenever events or changes in circumstances indicate the carrying value of goodwill may be impaired. Such<br />
events or changes in circumstances may include a significant deterioration in overall economic conditions, changes in the<br />
business climate of our industry, a decline in our market capitalization, operating performance indicators, competition,<br />
reorganizations of our business, U.S. Government budget restrictions or the disposal of all or a portion of a reporting unit.<br />
Our goodwill has been allocated to and is tested for impairment at a level referred to as the reporting unit, which is our<br />
business segment level or a level below the business segment. The level at which we test goodwill for impairment requires us<br />
to determine whether the operations below the business segment constitute a self-sustaining business for which discrete<br />
financial information is available and segment management regularly reviews the operating results.<br />
We may use both qualitative and quantitative approaches when testing goodwill for impairment. Under the qualitative<br />
approach for selected reporting units we perform a qualitative evaluation of events and circumstances impacting the reporting<br />
unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is more<br />
likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary.<br />
Otherwise we perform a quantitative two-step impairment test. For certain reporting units we only perform a quantitative<br />
impairment test.<br />
Under step one of the quantitative two step impairment test, we compare the fair value of a reporting unit to its carrying<br />
value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not<br />
impaired. If the carrying value of a reporting unit exceeds its fair value, we then perform step two of the quantitative<br />
impairment test and compare the implied value of the reporting unit’s goodwill with the carrying value of its goodwill. The<br />
implied value of the reporting unit’s goodwill is calculated by creating a hypothetical balance sheet as if the reporting unit<br />
had just been acquired. This balance sheet contains all assets and liabilities recorded at fair value (including any assumed<br />
intangible assets that may not have any corresponding carrying value in our balance sheet). The implied value of the<br />
reporting unit’s goodwill is calculated by subtracting the fair value of the net assets from the fair value of the reporting unit.<br />
If the carrying value of the reporting unit’s goodwill exceeds the implied value of that goodwill, an impairment loss is<br />
recognized in an amount equal to that excess.<br />
We estimate the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and<br />
market-based valuation methodologies such as comparable public company trading values and values observed in recent<br />
business acquisitions. Determining fair value requires the exercise of significant judgments, including the amount and timing<br />
of expected future cash flows, long-term growth rates, discount rates and relevant comparable public company earnings<br />
multiples and relevant transaction multiples. The cash flows employed in the DCF analyses are based on our best estimate of<br />
future sales, earnings and cash flows after considering factors such as general market conditions, U.S. Government budgets,<br />
existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in working capital, long term<br />
business plans and recent operating performance. The discount rates utilized in the DCF analysis are based on the respective<br />
reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital<br />
structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk<br />
inherent in future cash flows of the respective reporting unit.<br />
62
The carrying value of each reporting unit includes the assets and liabilities employed in its operations, goodwill and<br />
allocations of amounts held at the business segment and corporate levels. Corporate allocations include our postretirement<br />
benefit plans liabilities, as determined in accordance with CAS, in order to align the basis of the carrying values with the<br />
determination of the fair values of our reporting units, which are measured using CAS pension cost. CAS pension cost is<br />
recovered through the pricing of our products and services on U.S. Government contracts and, therefore, affects the fair value<br />
of each reporting unit. The amount of CAS pension liability allocated to each reporting unit is significantly influenced by a<br />
number of factors, including the discount rate used to estimate the obligation. On August 8, 2014, the HATFA, and on<br />
November 2, 2015, the Bipartisan Budget Act of 2015 was enacted, which extended the pension interest rate relief of the<br />
prior MAP-21. As a result, the interest rate used to calculate CAS pension costs recovered under our contracts with the U.S.<br />
Government increased with the resulting effect of decreasing the amount of CAS pension liability allocated to each reporting<br />
unit, contributing to an increase in the carrying value of each reporting unit.<br />
In the fourth quarter of 2015, we performed our annual goodwill impairment test for each of our reporting units. In<br />
connection with our fourth quarter 2015 program realignment, goodwill was reallocated between affected reporting units on a<br />
relative fair value basis. We performed goodwill impairment tests prior and subsequent to the realignment. The results of our<br />
2015 annual impairment tests of goodwill indicated that no impairment existed.<br />
In the fourth quarter of 2014, we performed our annual goodwill impairment test for each of our reporting units. The<br />
results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying values, with the<br />
exception of our Technical Services reporting unit within our IS&GS business segment. Technical Services, for which we<br />
recorded a $195 million goodwill impairment in 2013, experienced further declines in fair value during 2014. Technical<br />
Services which typically has smaller customer contracts of a shorter duration, has been adversely impacted by market<br />
pressures such as lower in-theater support as troop levels are drawn down and increased re-competition on existing contracts<br />
that are awarded primarily on the basis of price. As a result, we compared the implied value of that reporting unit’s goodwill<br />
with the carrying value of its goodwill, and since the carrying value exceeded the implied value, we recorded a non-cash<br />
impairment charge of $119 million in the fourth quarter of 2014 equal to that differential.<br />
As a result of the 2014 annual goodwill impairment test, our Civil reporting unit was considered at risk of future<br />
goodwill impairment due to market factors and because the fair value of the Civil reporting unit exceeded its carrying value<br />
by a margin of approximately 15%. The results of our 2015 annual goodwill impairment test indicated that our Civil<br />
reporting unit’s fair value was no longer considered at risk of future goodwill impairment due to an increase in assessed fair<br />
value.<br />
Impairment assessments inherently involve management judgments regarding a number of assumptions such as those<br />
described above. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of<br />
our recorded goodwill, differences in assumptions could have a material effect on the estimated fair value of one or more of<br />
our reporting units and could result in a goodwill impairment charge in a future period.<br />
Intangible Assets<br />
Intangible assets from acquired businesses are recognized at their estimated fair values at the date of acquisition and<br />
consist of customer programs, trademarks, customer relationships, technology and other intangible assets. Customer<br />
programs include values assigned to major programs of acquired businesses and represent the aggregate value associated<br />
with the customer relationships, contracts, technology and trademarks underlying the associated program. Acquired<br />
intangibles deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. This testing<br />
compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value.<br />
Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from three to twenty years, based<br />
on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows.<br />
Recent Accounting Pronouncements<br />
In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard that will change the way we<br />
recognize revenue and significantly expand the disclosure requirements for revenue arrangements. On July 9, 2015, the<br />
FASB approved a one-year deferral of the effective date of the standard to 2018 for public companies, with an option that<br />
would permit companies to adopt the standard in 2017. Early adoption prior to 2017 is not permitted. The new standard may<br />
be adopted either retrospectively or on a modified retrospective basis whereby the new standard would be applied to new<br />
contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up<br />
adjustment recorded to beginning retained earnings at the effective date for existing contracts with remaining performance<br />
63
obligations. In addition, the FASB is contemplating making additional changes to certain elements of the new standard. We<br />
are currently evaluating the methods of adoption allowed by the new standard and the effect the standard is expected to have<br />
on our consolidated financial statements and related disclosures. As the new standard will supersede substantially all existing<br />
revenue guidance affecting us under GAAP, it could impact revenue and cost recognition on thousands of contracts across all<br />
our business segments, in addition to our business processes and our information technology systems. As a result, our<br />
evaluation of the effect of the new standard will extend over future periods.<br />
In September 2015, the FASB issued a new standard that simplifies the accounting for adjustments made to preliminary<br />
amounts recognized in a business combination by eliminating the requirement to retrospectively account for those<br />
adjustments. Instead, adjustments will be recognized in the period in which the adjustments are determined, including the<br />
effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at<br />
the acquisition date. We adopted the standard on January 1, 2016 and will prospectively apply the standard to business<br />
combination adjustments identified after the date of adoption.<br />
In November 2015, the FASB issued a new standard that simplifies the presentation of deferred income taxes and<br />
requires that deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent in our<br />
consolidated balance sheets. The standard is effective January 1, 2017, with early adoption permitted. The standard may be<br />
applied either prospectively from the date of adoption or retrospectively to all prior periods presented. We are currently<br />
evaluating when we will adopt the standard and the method of adoption.<br />
ITEM 7A.<br />
Quantitative and Qualitative Disclosures About Market Risk.<br />
We maintain active relationships with a broad and diverse group of U.S. and international financial institutions. We<br />
believe that they provide us with sufficient access to the general and trade credit we require to conduct our business. We<br />
continue to closely monitor the financial market environment and actively manage counterparty exposure to minimize the<br />
potential impact from adverse developments with any single credit provider while ensuring availability of, and access to,<br />
sufficient credit resources.<br />
Our main exposure to market risk relates to interest rates, foreign currency exchange rates and market prices on certain<br />
equity securities. Our financial instruments that are subject to interest rate risk principally include fixed-rate long-term debt.<br />
The estimated fair value of our outstanding debt was $16.5 billion at December 31, 2015 and the outstanding principal<br />
amount was $16.2 billion, excluding unamortized discounts and deferred financing costs of $1.0 billion. A 10% change in the<br />
level of interest rates would not have a material impact on the fair value of our outstanding debt at December 31, 2015.<br />
We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency<br />
exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We<br />
transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into<br />
foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates<br />
change. Our most significant foreign currency exposures relate to the British Pound Sterling and the Canadian Dollar. These<br />
contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows<br />
associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We<br />
also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings,<br />
we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings indexed to<br />
LIBOR in order to reduce the amount of interest paid. These swaps are designated as fair value hedges. For variable rate<br />
borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in<br />
order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also<br />
may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are<br />
intended to mitigate certain economic exposures.<br />
The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on our<br />
intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives<br />
attributable to the effective portion of hedges are either reflected in earnings and largely offset by corresponding adjustments<br />
to the hedged items or reflected net of income taxes in accumulated other comprehensive loss until the hedged transaction is<br />
recognized in earnings. Changes in the fair value of the derivatives that are attributable to the ineffective portion of the<br />
hedges, or of derivatives that are not considered to be highly effective hedges, if any, are immediately recognized in earnings.<br />
The aggregate notional amount of our outstanding interest rate swaps at December 31, 2015 and 2014 was $1.5 billion and<br />
$1.3 billion. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2015 and 2014 was<br />
$4.1 billion and $804 million. At December 31, 2015 and 2014, the net fair value of our derivative instruments was not<br />
64
material (Note 15). A 10% appreciation or devaluation of the hedged currency as compared to the level of foreign exchange<br />
rates for currencies under contract at December 31, 2015 would not have a material impact on the aggregate net fair value of<br />
such contracts or our consolidated financial statements.<br />
We evaluate the credit quality of potential counterparties to derivative transactions and only enter into agreements with<br />
those deemed to have acceptable credit risk at the time the agreements are executed. Our foreign currency exchange hedge<br />
portfolio is diversified across several banks. We periodically monitor changes to counterparty credit quality as well as our<br />
concentration of credit exposure to individual counterparties. We do not hold or issue derivative financial instruments for<br />
trading or speculative purposes.<br />
We maintain a separate trust that includes investments to fund certain of our non-qualified deferred compensation plans.<br />
As of December 31, 2015, investments in the trust totaled $1.1 billion and are reflected at fair value on our Balance Sheet in<br />
other noncurrent assets. The trust holds investments in marketable equity securities and fixed-income securities that are<br />
exposed to price changes and changes in interest rates. A portion of the liabilities associated with the deferred compensation<br />
plans supported by the trust is also impacted by changes in the market price of our common stock and certain market indices.<br />
Changes in the value of the liabilities have the effect of partially offsetting the impact of changes in the value of the trust.<br />
Both the change in the fair value of the trust and the change in the value of the liabilities are recognized on our Statements of<br />
Earnings in other unallocated, net and were not material for the year ended December 31, 2015.<br />
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ITEM 8.<br />
Financial Statements and Supplementary Data.<br />
Board of Directors and Stockholders<br />
Lockheed Martin Corporation<br />
Report of Ernst & Young LLP,<br />
Independent Registered Public Accounting Firm,<br />
on the Audited Consolidated Financial Statements<br />
We have audited the accompanying consolidated balance sheets of Lockheed Martin Corporation as of December 31,<br />
2015 and 2014, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash<br />
flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of<br />
the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.<br />
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United<br />
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the<br />
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the<br />
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and<br />
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that<br />
our audits provide a reasonable basis for our opinion.<br />
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated<br />
financial position of Lockheed Martin Corporation at December 31, 2015 and 2014, and the consolidated results of its<br />
operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S.<br />
generally accepted accounting principles.<br />
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United<br />
States), Lockheed Martin Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria<br />
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the<br />
Treadway Commission (2013 framework) and our report dated February 24, 2016 expressed an unqualified opinion thereon.<br />
McLean, Virginia<br />
February 24, 2016<br />
66
Lockheed Martin Corporation<br />
Consolidated Statements of Earnings<br />
(in millions, except per share data)<br />
Years Ended December 31,<br />
2015 2014 2013<br />
Net sales<br />
Products $ 35,882 $ 36,093 $ 35,691<br />
Services 10,250 9,507 9,667<br />
Total net sales 46,132 45,600 45,358<br />
Cost of sales<br />
Products (32,006) (31,965) (31,346)<br />
Services (9,011) (8,393) (8,588)<br />
Goodwill impairment charges — (119) (195)<br />
Severance charges (102) — (201)<br />
Other unallocated, net 187 132 (841)<br />
Total cost of sales (40,932) (40,345) (41,171)<br />
Gross profit 5,200 5,255 4,187<br />
Other income, net 236 337 318<br />
Operating profit 5,436 5,592 4,505<br />
Interest expense (443) (340) (350)<br />
Other non-operating income, net 30 6 —<br />
Earnings from continuing operations before income taxes 5,023 5,258 4,155<br />
Income tax expense (1,418) (1,644) (1,205)<br />
Net earnings from continuing operations 3,605 3,614 2,950<br />
Net earnings from discontinued operations — — 31<br />
Net earnings $ 3,605 $ 3,614 $ 2,981<br />
Earnings per common share<br />
Basic<br />
Continuing operations $ 11.62 $ 11.41 $ 9.19<br />
Discontinued operations — — .10<br />
Basic earnings per common share $ 11.62 $ 11.41 $ 9.29<br />
Diluted<br />
Continuing operations $ 11.46 $ 11.21 $ 9.04<br />
Discontinued operations — — .09<br />
Diluted earnings per common share $ 11.46 $ 11.21 $ 9.13<br />
The accompanying notes are an integral part of these consolidated financial statements.<br />
67
Lockheed Martin Corporation<br />
Consolidated Statements of Comprehensive Income<br />
(in millions)<br />
Years Ended December 31,<br />
2015 2014 2013<br />
Net earnings $ 3,605 $ 3,614 $2,981<br />
Other comprehensive income (loss), net of tax<br />
Postretirement benefit plans<br />
Net other comprehensive (loss) income recognized during the period,<br />
net of tax benefit (expense) of $0.2 billion in 2015, $1.5 billion in<br />
2014 and $(1.6) billion in 2013 (351) (2,870) 2,868<br />
Amounts reclassified from accumulated other comprehensive loss, net of<br />
tax expense of $464 million in 2015, $386 million in 2014 and<br />
$555 million in 2013 850 706 1,015<br />
Other, net (73) (105) 9<br />
Other comprehensive income (loss), net of tax 426 (2,269) 3,892<br />
Comprehensive income $ 4,031 $ 1,345 $6,873<br />
The accompanying notes are an integral part of these consolidated financial statements.<br />
68
Lockheed Martin Corporation<br />
Consolidated Balance Sheets<br />
(in millions, except par value)<br />
December 31,<br />
2015 2014<br />
Assets<br />
Current assets<br />
Cash and cash equivalents $ 1,090 $ 1,446<br />
Receivables, net 8,061 5,877<br />
Inventories, net 4,962 2,804<br />
Deferred income taxes 1,463 1,451<br />
Other current assets 622 744<br />
Total current assets 16,198 12,322<br />
Property, plant and equipment, net 5,490 4,751<br />
Goodwill 13,576 10,862<br />
Intangible assets 4,147 324<br />
Deferred income taxes 4,470 4,013<br />
Other noncurrent assets 5,247 4,774<br />
Total assets $ 49,128 $ 37,046<br />
Liabilities and stockholders’ equity<br />
Current liabilities<br />
Accounts payable $ 1,974 $ 1,562<br />
Customer advances and amounts in excess of costs incurred 6,988 5,775<br />
Salaries, benefits and payroll taxes 1,916 1,824<br />
Current maturities of long-term debt 956 —<br />
Other current liabilities 2,223 1,951<br />
Total current liabilities 14,057 11,112<br />
Accrued pension liabilities 11,807 11,413<br />
Other postretirement benefit liabilities 1,070 1,102<br />
Long-term debt, net 14,305 6,142<br />
Other noncurrent liabilities 4,792 3,877<br />
Total liabilities 46,031 33,646<br />
Stockholders’ equity<br />
Common stock, $1 par value per share 303 314<br />
Additional paid-in capital — —<br />
Retained earnings 14,238 14,956<br />
Accumulated other comprehensive loss (11,444) (11,870)<br />
Total stockholders’ equity 3,097 3,400<br />
Total liabilities and stockholders’ equity $ 49,128 $ 37,046<br />
The accompanying notes are an integral part of these consolidated financial statements.<br />
69
Lockheed Martin Corporation<br />
Consolidated Statements of Cash Flows<br />
(in millions)<br />
Years Ended December 31,<br />
2015 2014 2013<br />
Operating activities<br />
Net earnings $ 3,605 $ 3,614 $ 2,981<br />
Adjustments to reconcile net earnings to net cash provided by<br />
operating activities<br />
Depreciation and amortization 1,026 994 990<br />
Stock-based compensation 138 164 189<br />
Deferred income taxes (445) (401) (5)<br />
Goodwill impairment charges — 119 195<br />
Severance charges 102 — 201<br />
Changes in assets and liabilities<br />
Receivables, net (256) 28 767<br />
Inventories, net (398) 77 (60)<br />
Accounts payable (160) 95 (647)<br />
Customer advances and amounts in excess of costs incurred (32) (572) (158)<br />
Postretirement benefit plans 1,068 (880) (375)<br />
Income taxes (48) 351 364<br />
Other, net 501 277 104<br />
Net cash provided by operating activities 5,101 3,866 4,546<br />
Investing activities<br />
Capital expenditures (939) (845) (836)<br />
Acquisitions of businesses and investments in affiliates (9,003) (898) (269)<br />
Other, net 208 20 (16)<br />
Net cash used for investing activities (9,734) (1,723) (1,121)<br />
Financing activities<br />
Repurchases of common stock (3,071) (1,900) (1,762)<br />
Proceeds from stock option exercises 174 308 827<br />
Dividends paid (1,932) (1,760) (1,540)<br />
Proceeds from the issuance of long-term debt 9,101 — —<br />
Repayments of long-term debt — — (150)<br />
Proceeds from borrowings under revolving credit facilities 6,000 — —<br />
Repayments of borrowings under revolving credit facilities (6,000) — —<br />
Other, net 5 38 (81)<br />
Net cash provided by (used for) financing activities 4,277 (3,314) (2,706)<br />
Net change in cash and cash equivalents (356) (1,171) 719<br />
Cash and cash equivalents at beginning of year 1,446 2,617 1,898<br />
Cash and cash equivalents at end of year $ 1,090 $ 1,446 $ 2,617<br />
The accompanying notes are an integral part of these consolidated financial statements.<br />
70
Lockheed Martin Corporation<br />
Consolidated Statements of Stockholders’ Equity<br />
(in millions, except per share data)<br />
Common<br />
Stock<br />
Additional<br />
Paid-In<br />
Capital<br />
Retained<br />
Earnings<br />
Accumulated<br />
Other<br />
Comprehensive<br />
Loss<br />
Total<br />
Stockholders’<br />
Equity<br />
Balance at December 31, 2012 $321 $ — $13,211 $(13,493) $ 39<br />
Net earnings — — 2,981 — 2,981<br />
Other comprehensive income, net of tax — — — 3,892 3,892<br />
Repurchases of common stock (16) (1,294) (434) — (1,744)<br />
Dividends declared ($4.78 per share) — — (1,558) — (1,558)<br />
Stock-based awards and ESOP activity 14 1,294 — — 1,308<br />
Balance at December 31, 2013 319 — 14,200 (9,601) 4,918<br />
Net earnings — — 3,614 — 3,614<br />
Other comprehensive income, net of tax — — — (2,269) (2,269)<br />
Repurchases of common stock (12) (792) (1,096) — (1,900)<br />
Dividends declared ($5.49 per share) — — (1,762) — (1,762)<br />
Stock-based awards and ESOP activity 7 792 — — 799<br />
Balance at December 31, 2014 314 — 14,956 (11,870) 3,400<br />
Net earnings — — 3,605 — 3,605<br />
Other comprehensive income, net of tax — — — 426 426<br />
Repurchases of common stock (15) (656) (2,400) — (3,071)<br />
Dividends declared ($6.15 per share) — — (1,923) — (1,923)<br />
Stock-based awards and ESOP activity 4 656 — — 660<br />
Balance at December 31, 2015 $303 $ — $14,238 $(11,444) $ 3,097<br />
The accompanying notes are an integral part of these consolidated financial statements.<br />
71
Note 1 – Significant Accounting Policies<br />
Lockheed Martin Corporation<br />
Notes to Consolidated Financial Statements<br />
Organization – We are a global security and aerospace company principally engaged in the research, design,<br />
development, manufacture, integration and sustainment of advanced technology systems, products and services. We also<br />
provide a broad range of management, engineering, technical, scientific, logistics and information services. We serve both<br />
U.S. and international customers with products and services that have defense, civil and commercial applications, with our<br />
principal customers being agencies of the U.S. Government.<br />
Basis of presentation – Our consolidated financial statements include the accounts of subsidiaries we control and<br />
variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in<br />
consolidation. Our receivables, inventories, customer advances and amounts in excess of costs incurred and certain amounts<br />
in other current liabilities primarily are attributable to long-term contracts or programs in progress for which the related<br />
operating cycles are longer than one year. In accordance with industry practice, we include these items in current assets and<br />
current liabilities. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements<br />
on a “per diluted share” basis. Certain prior period amounts have been reclassified to conform with current year presentation.<br />
On November 6, 2015, we completed the acquisition of Sikorsky Aircraft Corporation (Sikorsky) for $9.0 billion, net of<br />
cash acquired. Sikorsky, a global company primarily engaged in the design, manufacture, service and support of military and<br />
commercial helicopters, has become a wholly-owned subsidiary of ours, aligned under our MST business segment. The<br />
financial results of the acquired Sikorsky business have been included in our consolidated results of operations from the<br />
November 6, 2015 acquisition date through December 31, 2015. Accordingly, the consolidated financial results for the year<br />
ended December 31, 2015 do not reflect a full year of Sikorsky operations.<br />
During the fourth quarter of 2015, we realigned certain programs between our business segments in connection with the<br />
strategic review of our government informational technology (IT) and technical services businesses. The amounts, discussion<br />
and presentation of our business segments as set forth in all years presented in our consolidated financial statements have<br />
been reclassified from prior year presentation to reflect the realignment. The realignment did not impact the Corporation’s<br />
previously reported consolidated financial statements. See “Note 5 – Information on Business Segments” for additional<br />
information including revised historical segment results under our new structure.<br />
On January 26, 2016 we entered into definitive agreements to separate and combine our Information Systems & Global<br />
Solutions (IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a tax-efficient Reverse Morris Trust transaction.<br />
Subsequent to the program realignment described above, our IS&GS business segment represents the government IT and<br />
technical services businesses that were under strategic review. The transaction is expected to close in the third or fourth<br />
quarter of 2016. Until closing, IS&GS will operate as a business segment and financial results for the IS&GS business<br />
segment will be reported in our continuing operations. See “Note 3 – Acquisitions and Divestitures” for additional<br />
information about the planned divestiture of our IS&GS business segment.<br />
Use of estimates – We prepare our consolidated financial statements in conformity with U.S. generally accepted<br />
accounting principles (GAAP). In doing so, we are required to make estimates and assumptions that affect the amounts<br />
reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience<br />
and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis<br />
for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources.<br />
Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our<br />
consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement<br />
benefit plans, environmental receivables and liabilities, evaluation of goodwill and other assets for impairment, income taxes<br />
including deferred tax assets, fair value measurements and contingencies.<br />
Sales and earnings – We record net sales and estimated profits for substantially all of our contracts using the<br />
percentage-of-completion method for cost-reimbursable and fixed-price contracts for products and services with the U.S.<br />
Government. Sales are recorded on all time-and-materials contracts as the work is performed based on agreed-upon hourly<br />
rates and allowable costs. We account for our services contracts with non-U.S. Government customers using the services<br />
method of accounting. We classify net sales as products or services on our Statements of Earnings based on the attributes of<br />
the underlying contracts.<br />
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Percentage-of-Completion Method – The percentage-of-completion method for product contracts depends on the nature<br />
of the products provided under the contract. For example, for contracts that require us to perform a significant level of<br />
development effort in comparison to the total value of the contract and/or to deliver minimal quantities, sales are recorded<br />
using the cost-to-cost method to measure progress toward completion. Under the cost-to-cost method of accounting, we<br />
recognize sales and an estimated profit as costs are incurred based on the proportion that the incurred costs bear to total<br />
estimated costs. For contracts that require us to provide a substantial number of similar items without a significant level of<br />
development, we record sales and an estimated profit on a percentage-of-completion basis using units-of-delivery as the basis<br />
to measure progress toward completing the contract. For contracts to provide services to the U.S. Government, sales are<br />
generally recorded using the cost-to-cost method.<br />
Award and incentive fees, as well as penalties related to contract performance, are considered in estimating sales and<br />
profit rates on contracts accounted for under the percentage-of-completion method. Estimates of award fees are based on past<br />
experience and anticipated performance. We record incentives or penalties when there is sufficient information to assess<br />
anticipated contract performance. Incentive provisions that increase or decrease earnings based solely on a single significant<br />
event are not recognized until the event occurs.<br />
Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks,<br />
estimating contract sales and costs (including estimating award and incentive fees and penalties related to performance) and<br />
making assumptions for schedule and technical issues. Due to the number of years it may take to complete many of our<br />
contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and<br />
costs at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in<br />
estimated total contract sales or estimated total costs are required, any changes from prior estimates are recognized in the<br />
current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract<br />
exceed estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which<br />
the loss is determined.<br />
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract,<br />
we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the<br />
effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical<br />
requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number<br />
and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our<br />
industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with<br />
international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the<br />
technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates<br />
may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and<br />
cost aspects of the contract which decreases the estimated total costs to complete the contract. Conversely, our profit booking<br />
rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change<br />
during the performance of the contract and may affect the profit booking rate.<br />
In addition, comparability of our business segment sales, operating profit and operating margins may be impacted by<br />
changes in profit booking rates on our contracts accounted for using the percentage-of-completion method of accounting.<br />
Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total<br />
costs that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate<br />
resulting in an increase in the estimated total costs to complete and a reduction in the profit booking rate. Increases or<br />
decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes.<br />
Segment operating profit and margins may also be impacted favorably or unfavorably by other items. Favorable items may<br />
include the positive resolution of contractual matters, cost recoveries on restructuring charges, insurance recoveries and gains<br />
on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except<br />
for significant severance actions (such as those mentioned below in Note 15) which are excluded from segment operating<br />
results; reserves for disputes; asset impairments; and losses on sales of assets. Segment operating profit and items such as<br />
risk retirements, reductions of profit booking rates or other matters are presented net of state income taxes.<br />
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters,<br />
net of state income taxes, increased segment operating profit, by approximately $1.9 billion in 2015, $1.8 billion in 2014 and<br />
$2.1 billion in 2013. These adjustments increased net earnings by approximately $1.2 billion ($3.87 per share) in 2015,<br />
$1.1 billion ($3.55 per share) in 2014 and $1.3 billion ($4.09 per share) in 2013.<br />
Services Method – For cost-reimbursable contracts for services to non-U.S. Government customers, we record net sales<br />
as services are performed, except for award and incentive fees. Award and incentive fees are recorded when they are fixed or<br />
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determinable, generally at the date the amount is communicated to us by the customer. This approach results in the<br />
recognition of such fees at contractual intervals (typically every six months) throughout the contract and is dependent on the<br />
customer’s processes for notification of awards and issuance of formal notifications. Under fixed-price service contracts, we<br />
are paid a predetermined fixed amount for a specified scope of work and generally have full responsibility for the costs<br />
associated with the contract and the resulting profit or loss. We record net sales under fixed-price service contracts with non-<br />
U.S. Government customers on a straight-line basis over the period of contract performance, unless evidence suggests that<br />
net sales are earned or the obligations are fulfilled in a different pattern. Costs for all service contracts are expensed as<br />
incurred.<br />
Research and development and similar costs – Except for certain arrangements described below, we account for<br />
independent research and development costs as part of the general and administrative costs that are allocated among all of<br />
our contracts and programs in progress under U.S. Government contractual arrangements and charged to cost of sales. Under<br />
certain arrangements in which a customer shares in product development costs, our portion of unreimbursed costs is<br />
expensed as incurred in cost of sales. Independent research and development costs charged to cost of sales totaled<br />
$839 million in 2015, $751 million in 2014 and $697 million in 2013. Costs we incur under customer-sponsored research and<br />
development programs pursuant to contracts are included in net sales and cost of sales.<br />
Stock-based compensation – Compensation cost related to all share-based payments is measured at the grant date based<br />
on the estimated fair value of the award. We generally recognize the compensation cost ratably over a three-year vesting<br />
period.<br />
Income taxes – We calculate our provision for income taxes using the asset and liability method, under which deferred<br />
tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist<br />
between the financial statement carrying amount of assets and liabilities and their respective tax bases, as well as from<br />
operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates that will<br />
apply in the years in which we expect the temporary differences to be recovered or paid.<br />
We periodically assess our tax filing exposures related to periods that are open to examination. Based on the latest<br />
available information, we evaluate our tax positions to determine whether the position will more-likely-than-not be sustained<br />
upon examination by the Internal Revenue Service (IRS) or other taxing authorities. If we cannot reach a more-likely-thannot<br />
determination, no benefit is recorded. If we determine that the tax position is more-likely-than-not to be sustained, we<br />
record the largest amount of benefit that is more-likely-than-not to be realized when the tax position is settled. We record<br />
interest and penalties related to income taxes as a component of income tax expense on our Statements of Earnings. Interest<br />
and penalties were not material.<br />
Cash and cash equivalents – Cash equivalents include highly liquid instruments with original maturities of 90 days or<br />
less.<br />
Receivables – Receivables include amounts billed and currently due from customers and unbilled costs and accrued<br />
profits primarily related to sales on long-term contracts that have been recognized but not yet billed to customers. Pursuant to<br />
contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, assets<br />
related to such contracts as a result of advances, performance-based payments and progress payments. We reflect those<br />
advances and payments as an offset to the related receivables balance for contracts that we account for on a percentage-ofcompletion<br />
basis using the cost-to-cost method to measure progress towards completion.<br />
Inventories – We record inventories at the lower of cost or estimated net realizable value. Costs on long-term contracts<br />
and programs in progress represent recoverable costs incurred for production or contract-specific facilities and equipment,<br />
allocable operating overhead, advances to suppliers and, in the case of contracts with the U.S. Government and substantially<br />
all other governments, research and development and general and administrative expenses. Pursuant to contract provisions,<br />
agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such<br />
contracts as a result of advances, performance-based payments and progress payments. We reflect those advances and<br />
payments as an offset against the related inventory balances for contracts that we account for on a percentage-of-completion<br />
basis using units-of-delivery as the basis to measure progress toward completing the contract. We determine the costs of<br />
other product and supply inventories by the first-in first-out or average cost methods.<br />
Property, plant and equipment – We record property, plant and equipment at cost. We provide for depreciation and<br />
amortization on plant and equipment generally using accelerated methods during the first half of the estimated useful lives of<br />
the assets and the straight-line method thereafter. The estimated useful lives of our plant and equipment generally range from<br />
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10 to 40 years for buildings and five to 15 years for machinery and equipment. No depreciation expense is recorded on<br />
construction in progress until such assets are placed into operation. Depreciation expense related to plant and equipment was<br />
$738 million in 2015, $739 million in 2014 and $714 million in 2013.<br />
We review the carrying amounts of long-lived assets for impairment if events or changes in the facts and circumstances<br />
indicate that their carrying amounts may not be recoverable. We assess impairment by comparing the estimated undiscounted<br />
future cash flows of the related asset grouping to its carrying amount. If an asset is determined to be impaired, we recognize<br />
an impairment charge in the current period for the difference between the fair value of the asset and its carrying amount.<br />
Capitalized software – We capitalize certain costs associated with the development or purchase of internal-use<br />
software. The amounts capitalized are included in other noncurrent assets on our Balance Sheets and are amortized on a<br />
straight-line basis over the estimated useful life of the resulting software, which ranges from two to six years. As of<br />
December 31, 2015 and 2014, capitalized software totaled $481 million and $547 million, net of accumulated amortization of<br />
$1.9 billion and $1.8 billion. No amortization expense is recorded until the software is ready for its intended use.<br />
Amortization expense related to capitalized software was $172 million in 2015, $206 million in 2014 and $228 million in<br />
2013.<br />
Goodwill – The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at<br />
their estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the<br />
underlying identifiable net assets of acquired businesses.<br />
We perform an impairment test of our goodwill at least annually in the fourth quarter and more frequently whenever<br />
certain events or changes in circumstances indicate the carrying value of goodwill may be impaired. Such events or changes<br />
in circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of<br />
our industry, a decline in our market capitalization, operating performance indicators, competition, reorganizations of our<br />
business or the disposal of all or a portion of a reporting unit. Our goodwill has been allocated to and is tested for impairment<br />
at a level referred to as the reporting unit, which is our business segment level or a level below the business segment. The<br />
level at which we test goodwill for impairment requires us to determine whether the operations below the business segment<br />
constitute a business for which discrete financial information is available and segment management regularly reviews the<br />
operating results.<br />
We may use both qualitative and quantitative approaches when testing goodwill for impairment. Under the qualitative<br />
approach, for selected reporting units we perform a qualitative evaluation of events and circumstances impacting the<br />
reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is<br />
more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary.<br />
Otherwise, we perform a quantitative two-step impairment test. For certain reporting units we only perform a quantitative<br />
impairment test.<br />
Under step one of the quantitative impairment test, we compare the fair value of each reporting unit to its carrying value,<br />
including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not<br />
impaired. If the carrying value of a reporting unit exceeds its fair value, we then perform step two of the quantitative<br />
impairment test and compare the implied value of the reporting unit’s goodwill with the carrying value of its goodwill. The<br />
implied value of the reporting unit’s goodwill is calculated by creating a hypothetical balance sheet as if the reporting unit<br />
had just been acquired. This balance sheet contains all assets and liabilities recorded at fair value (including any intangible<br />
assets that may not have any corresponding carrying value in our balance sheet). The implied value of the reporting unit’s<br />
goodwill is calculated by subtracting the fair value of the net assets from the fair value of the reporting unit. If the carrying<br />
value of the reporting unit’s goodwill exceeds the implied value of that goodwill, an impairment loss is recognized in an<br />
amount equal to that excess.<br />
We estimate the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and<br />
market-based valuation methodologies such as comparable public company trading values and values observed in recent<br />
business acquisitions. Determining fair value requires the exercise of significant judgments, including judgments about the<br />
amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public<br />
company earnings multiples and relevant transaction multiples. The cash flows employed in the DCF analyses are based on<br />
our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, U.S.<br />
Government budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in<br />
working capital, long-term business plans and recent operating performance. The discount rates utilized in the DCF analysis<br />
are based on the respective reporting unit’s weighted average cost of capital, which takes into account the relative weights of<br />
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each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate<br />
to consider the risk inherent in future cash flows of the respective reporting unit.<br />
In the fourth quarter of 2015, we performed our annual goodwill impairment test for each of our reporting units. During<br />
the fourth quarter of 2015, we realigned certain programs between our business segments in connection with our strategic<br />
review of our government IT and technical services businesses. As part of the realignment, goodwill was reallocated between<br />
affected reporting units on a relative fair value basis. We performed goodwill impairment tests prior and subsequent to the<br />
realignment. The results of our 2015 annual impairment tests of goodwill indicated that no impairment existed.<br />
In the fourth quarter of 2014, we completed our annual goodwill impairment test for each of our reporting units. The<br />
results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying values, with the<br />
exception of our Technical Services reporting unit within our IS&GS business segment. The impact of market pressures such<br />
as lower in-theater support as troop levels are drawn down and increased re-competition on existing contracts that are<br />
awarded primarily on the basis of price adversely impacted the fair value of this reporting unit. As a result, we compared the<br />
implied value of that reporting unit’s goodwill with the carrying value of its goodwill, and since the carrying value exceeded<br />
the implied value, we recorded a non-cash impairment charge of $119 million in the fourth quarter of 2014 equal to that<br />
differential. This charge reduced our net earnings by $107 million ($.33 per share).<br />
During the fourth quarter of 2013, due to the continuing impact of defense budget reductions and related competitive<br />
pressures on the Technical Services business, we recorded a non-cash goodwill impairment charge of $195 million. This<br />
charge reduced our 2013 net earnings by $176 million ($.54 per share).<br />
Intangible assets – Intangible assets from acquired businesses are recognized at their estimated fair values at the date of<br />
acquisition and consist of customer programs, trademarks, customer relationships, technology and other intangible assets.<br />
Customer programs include values assigned to major programs of acquired businesses and represent the aggregate value<br />
associated with the customer relationships, contracts, technology and trademarks underlying the associated program.<br />
Acquired intangibles deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. This<br />
testing compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair<br />
value. Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from three to twenty years,<br />
based on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows.<br />
Customer advances and amounts in excess of cost incurred – We receive advances, performance-based payments and<br />
progress payments from customers that may exceed costs incurred on certain contracts, including contracts with agencies of<br />
the U.S. Government. We classify such advances, other than those reflected as a reduction of receivables or inventories as<br />
discussed above, as current liabilities.<br />
Debt issuance costs – In 2015, we early adopted a new standard of the Financial Accounting Standards Board (FASB)<br />
which simplifies the presentation of debt issuance costs. In accordance with the new standard, we now reflect debt issuance<br />
costs as a reduction from the face amount of debt on our consolidated balance sheets. These costs, which are $95 million and<br />
$27 million as of December 31, 2015 and 2014, are amortized as interest expense over the life of the related debt. In prior<br />
year presentation, these costs were reflected within other noncurrent assets on our consolidated balance sheets.<br />
Postretirement benefit plans – Many of our employees are covered by defined benefit pension plans and we provide<br />
certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans). GAAP requires<br />
that the amounts we record related to our postretirement benefit plans be computed, based on service to date, using actuarial<br />
valuations that are based in part on certain key economic assumptions we make, including the discount rate, the expected<br />
long-term rate of return on plan assets and other actuarial assumptions including participant longevity (also known as<br />
mortality) estimates, health care cost trend rates and employee turnover, each as appropriate based on the nature of the plans.<br />
We recognize on a plan-by-plan basis the funded status of our postretirement benefit plans under GAAP as either an asset<br />
recorded within other noncurrent assets or a liability recorded within noncurrent liabilities on our Balance Sheets. There is a<br />
corresponding non-cash adjustment to accumulated other comprehensive loss, net of tax benefits recorded as deferred tax<br />
assets, in stockholders’ equity. The GAAP funded status is measured as the difference between the fair value of the plan’s<br />
assets and the benefit obligation of the plan. The funded status under the Employee Retirement Income Security Act of 1974<br />
(ERISA), as amended by the Pension Protection Act of 2006 (PPA), is calculated on a different basis than under GAAP.<br />
Environmental matters – We record a liability for environmental matters when it is probable that a liability has been<br />
incurred and the amount can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs<br />
to be incurred for remediation at a particular site. We do not discount the recorded liabilities, as the amount and timing of<br />
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future cash payments are not fixed or cannot be reliably determined. Our environmental liabilities are recorded on our<br />
Balance Sheets within other liabilities, both current and noncurrent. We expect to include a substantial portion of<br />
environmental costs in our net sales and cost of sales in future periods pursuant to U.S. Government agreement or regulation.<br />
At the time a liability is recorded for future environmental costs, we record a receivable for estimated future recovery<br />
considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of the<br />
contract form (e.g., cost-reimbursable, fixed-price). We continuously evaluate the recoverability of our environmental<br />
receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and<br />
contract mix and our history of receiving reimbursement of such costs. We include the portion of those environmental costs<br />
expected to be allocated to our non-U.S. Government contracts, or that is determined to not be recoverable under U.S.<br />
Government contracts, in our cost of sales at the time the liability is established. Our environmental receivables are recorded<br />
on our Balance Sheets within other assets, both current and noncurrent. We project costs and recovery of costs over<br />
approximately 20 years.<br />
Investments in marketable securities – Investments in marketable securities consist of debt and equity securities and<br />
are classified as trading securities. As of December 31, 2015 and 2014, the fair value of our trading securities totaled<br />
$1.1 billion and $1.1 billion and was included in other noncurrent assets on our Balance Sheets. Our trading securities are<br />
held in a separate trust, which includes investments to fund our deferred compensation plan liabilities. Net losses on trading<br />
securities in 2015 were $11 million and net gains on trading securities in 2014 and 2013 were $65 million and $64 million.<br />
Gains and losses on these investments are included in other unallocated, net within cost of sales on our Statements of<br />
Earnings in order to align the classification of changes in the market value of investments held for the plan with changes in<br />
the value of the corresponding plan liabilities.<br />
Equity method investments – Investments where we have the ability to exercise significant influence, but do not<br />
control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our Balance<br />
Sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method<br />
of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on<br />
our Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment<br />
holding the investment. We evaluate our equity method investments for impairment whenever events or changes in<br />
circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity<br />
method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. As of<br />
December 31, 2015 and 2014, our equity method investments totaled $1.3 billion and $971 million, which primarily are<br />
composed of our Space Systems business segment’s investment in United Launch Alliance (ULA), as further described in<br />
Note 14, and our Aeronautics and MST business segments’ investments in Advanced Military Maintenance, Repair and<br />
Overhaul Center. Our share of net earnings related to our equity method investees was $343 million in 2015, $342 million in<br />
2014 and $321 million in 2013, of which approximately $245 million, $280 million and $300 million related to our Space<br />
Systems business segment.<br />
Derivative financial instruments – We use derivative instruments principally to reduce our exposure to market risks<br />
from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for<br />
speculative trading purposes. We transact business globally and are subject to risks associated with changing foreign<br />
currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as<br />
foreign currency exchange rates change. These contracts hedge forecasted foreign currency transactions in order to mitigate<br />
fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign<br />
currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our<br />
borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate<br />
borrowings to variable rate borrowings in order to reduce the amount of interest paid. These swaps are designated as fair<br />
value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate<br />
borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are<br />
designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not<br />
qualify for hedge accounting, which are intended to mitigate certain economic exposures.<br />
We record derivatives at their fair value. The classification of gains and losses resulting from changes in the fair values<br />
of derivatives is dependent on our intended use of the derivative and its resulting designation. Adjustments to reflect changes<br />
in fair values of derivatives attributable to the effective portion of hedges are either reflected in earnings and largely offset by<br />
corresponding adjustments to the hedged items or reflected net of income taxes in accumulated other comprehensive loss<br />
until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are attributable to the<br />
ineffective portion of the hedges or of derivatives that are not considered to be highly effective hedges, if any, are<br />
immediately recognized in earnings. The aggregate notional amount of our outstanding interest rate swaps at December 31,<br />
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2015 and 2014 was $1.5 billion and $1.3 billion. The aggregate notional amount of our outstanding foreign currency hedges<br />
at December 31, 2015 and 2014 was $4.1 billion and $804 million. Derivative instruments did not have a material impact on<br />
net earnings and comprehensive income during 2015, 2014 and 2013. Substantially all of our derivatives are designated for<br />
hedge accounting. See Note 16 for more information on the fair value measurements related to our derivative instruments.<br />
Recent Accounting Pronouncements – In May 2014, the FASB issued a new standard that will change the way we<br />
recognize revenue and significantly expand the disclosure requirements for revenue arrangements. On July 9, 2015, the<br />
FASB approved a one-year deferral of the effective date of the standard to 2018 for public companies, with an option that<br />
would permit companies to adopt the standard in 2017. Early adoption prior to 2017 is not permitted. The new standard may<br />
be adopted either retrospectively or on a modified retrospective basis whereby the new standard would be applied to new<br />
contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up<br />
adjustment recorded to beginning retained earnings at the effective date for existing contracts with remaining performance<br />
obligations. In addition, the FASB is contemplating making additional changes to certain elements of the new standard. We<br />
are currently evaluating the methods of adoption allowed by the new standard and the effect the standard is expected to have<br />
on our consolidated financial statements and related disclosures. As the new standard will supersede substantially all existing<br />
revenue guidance affecting us under GAAP, it could impact revenue and cost recognition on thousands of contracts across all<br />
our business segments, in addition to our business processes and our information technology systems. As a result, our<br />
evaluation of the effect of the new standard will extend over future periods.<br />
In September 2015, the FASB issued a new standard that simplifies the accounting for adjustments made to preliminary<br />
amounts recognized in a business combination by eliminating the requirement to retrospectively account for those<br />
adjustments. Instead, adjustments will be recognized in the period in which the adjustments are determined, including the<br />
effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at<br />
the acquisition date. We adopted the standard on January 1, 2016 and will prospectively apply the standard to business<br />
combination adjustments identified after the date of adoption.<br />
In November 2015, the FASB issued a new standard that simplifies the presentation of deferred income taxes and<br />
requires that deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent in our<br />
consolidated balance sheets. The standard is effective January 1, 2017, with early adoption permitted. The standard may be<br />
applied either prospectively from the date of adoption or retrospectively to all prior periods presented. We are currently<br />
evaluating when we will adopt the standard and the method of adoption.<br />
Note 2 – Earnings Per Share<br />
The weighted average number of shares outstanding used to compute earnings per common share were as follows<br />
(in millions):<br />
2015 2014 2013<br />
Weighted average common shares outstanding for basic computations 310.3 316.8 320.9<br />
Weighted average dilutive effect of equity awards 4.4 5.6 5.6<br />
Weighted average common shares outstanding for diluted computations 314.7 322.4 326.5<br />
We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average<br />
number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also<br />
includes the dilutive effects for the assumed vesting of outstanding restricted stock units and exercise of outstanding stock<br />
options based on the treasury stock method.<br />
The computation of diluted earnings per common share excluded 2.4 million stock options for the year ended<br />
December 31, 2013 because their inclusion would have been anti-dilutive, primarily due to their exercise prices exceeding<br />
the average market prices of our common stock during the respective periods. There were no anti-dilutive equity awards for<br />
the years ended December 31, 2015 and 2014.<br />
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Note 3 – Acquisitions and Divestitures<br />
Acquisitions<br />
Acquisition of Sikorsky Aircraft Corporation<br />
On November 6, 2015, we completed the acquisition of Sikorsky Aircraft Corporation and certain affiliated companies<br />
(collectively “Sikorsky”) from United Technologies Corporation (UTC) and certain of UTC’s subsidiaries. The purchase<br />
price of the acquisition was $9.0 billion, net of cash acquired. As a result of the acquisition, Sikorsky became a whollyowned<br />
subsidiary of ours. Sikorsky is a global company primarily engaged in the research, design, development,<br />
manufacture and support of military and commercial helicopters. Sikorsky’s products include military helicopters such as the<br />
H-60 Black Hawk, MH-60R Seahawk, CH-53K, H-92; and commercial helicopters such as the S-76 and S-92. The<br />
acquisition enables us to extend our core business into the military and commercial rotary wing markets, allowing us to<br />
strengthen our position in the aerospace and defense industry. Further, this acquisition will expand our presence in<br />
commercial and international markets. Sikorsky has been aligned under our MST business segment.<br />
To fund the $9.0 billion acquisition price, we utilized $6.0 billion of proceeds borrowed under our 364-day revolving<br />
credit facility (the 364-day Facility), $2.0 billion of cash on hand and $1.0 billion from the issuance of commercial paper. In<br />
the fourth quarter of 2015, we repaid all outstanding borrowings under the 364-day Facility with the proceeds from the<br />
issuance of $7.0 billion of fixed interest-rate long-term notes in a public offering (the November 2015 Notes). In the fourth<br />
quarter of 2015, we also repaid the $1.0 billion in commercial paper borrowings (see Note 10).<br />
We and UTC made a joint election under Section 338(h)(10) of the Internal Revenue Code, which treats the transaction<br />
as an asset purchase for tax purposes. This election generates a cash tax benefit with an estimated net present value of<br />
$1.9 billion for Lockheed Martin and its stockholders.<br />
Preliminary Allocation of Acquisition Price to Assets Acquired and Liabilities Assumed<br />
We accounted for the acquisition of Sikorsky as a business combination, which requires us to record the assets acquired<br />
and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired<br />
is recorded as goodwill. We have commenced the appraisals necessary to assess the fair values of the tangible and intangible<br />
assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. The amounts<br />
recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is<br />
obtained about the facts and circumstances that existed as of the acquisition date. The final determination of the fair values of<br />
certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date<br />
permitted under GAAP. The size, breadth, and timing of the Sikorsky acquisition could necessitate the need to use the full<br />
one year measurement period to adequately analyze and assess a number of the factors used in establishing the asset and<br />
liability fair values as of the acquisition date including contractual and operational factors underlying the customer programs<br />
intangible assets, the tradename intangible asset, customer contractual obligations, property, plant and equipment,<br />
inventories, receivables and deferred revenue; and the assumptions underpinning certain reserves such as those for<br />
environmental and legal obligations. The final values may also result in changes to depreciation and amortization expense<br />
related to certain assets such as buildings, equipment and intangible assets. Any potential adjustments made could be<br />
material in relation to the preliminary values presented in the table below.<br />
79
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition<br />
date (in millions):<br />
November 6, 2015<br />
Cash and cash equivalents $ 75<br />
Receivables 1,921<br />
Inventories 1,817<br />
Deferred income taxes, current 72<br />
Other current assets 36<br />
Property, plant and equipment 654<br />
Goodwill 2,764<br />
Intangible assets:<br />
Customer programs 3,127<br />
Trademarks 816<br />
Other noncurrent assets 502<br />
Deferred income taxes, noncurrent 214<br />
Total identifiable assets and goodwill 11,998<br />
Accounts payable (565)<br />
Customer advances and amounts in excess of costs incurred (1,220)<br />
Salaries, benefits, and payroll taxes (105)<br />
Current portion of long-term debt (5)<br />
Other current liabilities (347)<br />
Long-term debt (11)<br />
Customer contractual obligations (a) (480)<br />
Other noncurrent liabilities (150)<br />
Deferred income tax liabilities, noncurrent (a) (32)<br />
Total liabilities assumed (2,915)<br />
Total consideration $ 9,083<br />
(a)<br />
Recorded in Other noncurrent liabilities on the consolidated balance sheet.<br />
Intangible assets related to customer programs were recognized for each major helicopter and aftermarket program and<br />
represent the aggregate value associated with the customer relationships, contracts, technology and tradenames underlying<br />
the associated program. These intangible assets will be amortized over a weighted-average useful life of approximately<br />
15 years in accordance with the underlying pattern of economic benefit as reflected by the future net cash inflows.<br />
Customer contractual obligations represent liabilities on certain development programs where the expected costs exceed<br />
the expected sales under contract. We measured these liabilities based on the price to transfer the obligation to a market<br />
participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the<br />
estimated net cash outflows of the developmental programs plus a reasonable contracting profit margin required to transfer<br />
the contracts to market participants, we recorded assumed liabilities of approximately $480 million. These liabilities will be<br />
liquidated in accordance with the underlying economic pattern of the contractual obligations, as reflected by the estimated<br />
future net cash outflows incurred on the associated contracts. Estimated liquidation of the contractual obligation is estimated<br />
is as follows: $85 million in 2016, $90 million in 2017, $65 million in 2018, $60 million in 2019, $60 million in 2020 and<br />
$110 million thereafter.<br />
The fair values of the assets acquired and liabilities assumed were preliminarily determined using income, market and<br />
cost valuation methodologies. The fair value measurements were estimated using significant inputs that are not observable in<br />
the market and thus represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820. The<br />
income approach was primarily used to value the customer programs and trademarks intangible assets. The income approach<br />
indicates value for an asset or liability based on the present value of cash flow projected to be generated over the remaining<br />
economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered<br />
from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected<br />
pricing, remaining developmental effort, operational performance including company specific synergies, aftermarket<br />
retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where<br />
appropriate, the net cash flows are adjusted to reflect the uncertainties associated with the underlying assumptions, as well as<br />
the risk profile of the net cash flows utilized in the valuation. The adjusted future cash flows are then discounted to present<br />
80
value using an appropriate discount rate. Projected cash flow is discounted at a required rate of return that reflects the relative<br />
risk of achieving the cash flow and the time value of money. The market approach is a valuation technique that uses prices<br />
and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a<br />
group of assets and liabilities. Valuation techniques consistent with the market approach often use market multiples derived<br />
from a set of comparables. The cost approach, which estimates value by determining the current cost of replacing an asset<br />
with another of equivalent economic utility, was used, as appropriate, for property, plant and equipment. The cost to replace<br />
a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due<br />
to depreciation.<br />
The preliminary purchase price allocation resulted in the recognition of $2.8 billion of goodwill, all of which is expected<br />
to be amortizable for tax purposes. All of the goodwill was assigned to our MST business segment. The goodwill recognized<br />
is attributable to expected revenue synergies generated by the integration of our products and technologies with those of<br />
Sikorsky, costs synergies resulting from the consolidation or elimination of certain functions, and intangible assets that do<br />
not qualify for separate recognition, such as the assembled workforce of Sikorsky.<br />
Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgments,<br />
including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows<br />
employed in the DCF analyses are based on our best estimate of future sales, earnings and cash flows after considering<br />
factors such as general market conditions, customer budgets, existing firm orders, expected future orders, contracts with<br />
suppliers, labor agreements, changes in working capital, long term business plans and recent operating performance. Use of<br />
different estimates and judgments could yield different results.<br />
Impact to 2015 Financial Results<br />
Sikorsky’s financial results have been included in our consolidated financial results only for the period from the<br />
November 6, 2015 acquisition date through December 31, 2015. As a result, our consolidated financial results for the year<br />
ended December 31, 2015 do not reflect a full year of Sikorsky’s results. From the November 6, 2015 acquisition date<br />
through December 31, 2015, Sikorsky generated net sales of approximately $400 million and operating loss of approximately<br />
$45 million, inclusive of intangible amortization and adjustments required to account for the acquisition.<br />
We incurred approximately $38 million of non-recoverable transaction costs associated with the Sikorsky acquisition in<br />
2015 that were expensed as incurred. These costs are included in “Other income, net” on our Consolidated Statements of<br />
Earnings. We also incurred approximately $48 million in costs associated with issuing the $7.0 billion November 2015 Notes<br />
used to repay all outstanding borrowings under the 364-day Facility used to finance the acquisition. The financing costs were<br />
recorded as a reduction of debt and will be amortized to interest expense over the term of the related debt.<br />
Supplemental Pro Forma Financial Information (unaudited)<br />
The following table presents summarized unaudited pro forma financial information as if Sikorsky had been included in<br />
our financial results for the entire years in 2015 and 2014 (in millions):<br />
2015 2014<br />
Net Sales $ 50,962 $ 53,023<br />
Net Earnings from continuing operations 3,538 3,480<br />
Basic earnings per common share from continuing operations 11.40 10.99<br />
Diluted earnings per common share from continuing operations 11.24 10.79<br />
The unaudited supplemental pro forma financial data above has been calculated after applying our accounting policies<br />
and adjusting the historical results of Sikorsky with pro forma adjustments, net of tax, that assume the acquisition occurred<br />
on January 1, 2014. Significant pro forma adjustments include the recognition of additional amortization expense related to<br />
acquired intangible assets and additional interest expense related to the short-term debt used to finance the acquisition. These<br />
adjustments assume the application of fair value adjustments to intangibles and the debt issuance occurred on January 1,<br />
2014 and are as follows: amortization expense of $125 million and $148 million in 2015 and 2014, respectively; and interest<br />
expense $42 million and $48 million in 2015 and 2014, respectively. In addition, significant nonrecurring adjustments<br />
include the elimination of a $72 million pension curtailment loss, net of tax, recognized in 2015 and the elimination of a<br />
$58 million income tax charge related to historic earnings of foreign subsidiaries recognized by Sikorsky in 2015.<br />
81
The unaudited supplemental pro forma financial information also reflects an increase in interest expense, net of tax, of<br />
$109 million and $121 million in 2015 and 2014, respectively. The increase in interest expense is the result of assuming the<br />
November 2015 Notes were issued on January 1, 2014. Proceeds of the November 2015 Notes were used to repay all<br />
outstanding borrowings under the 364-day Facility used to finance a portion of the purchase of Sikorsky, as contemplated at<br />
the date of acquisition.<br />
The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing<br />
cost or revenue synergies relating to the integration of the two companies. Further, the pro forma data should not be<br />
considered indicative of the results that would have occurred if the acquisition, related financing and associated notes<br />
issuance and repayment of the 364-day credit facility had been consummated on January 1, 2014, nor are they indicative of<br />
future results.<br />
Other acquisitions<br />
We paid $898 million in 2014 for acquisitions of businesses and investments in affiliates, net of cash acquired, primarily<br />
related to the acquisitions of Systems Made Simple, Zeta and Industrial Defender. On December 1, 2014, we completed the<br />
acquisition of all interests in Systems Made Simple, a provider of health information technology solutions, which is included<br />
in our IS&GS business segment. On August 18, 2014, we completed the acquisition of all interests in Zeta, a designer of<br />
systems that enable collection, processing, safeguarding and dissemination of information for intelligence and defense<br />
communities, which is included in our Space Systems business segment. On April 7, 2014, we completed the acquisition of<br />
all interest in Industrial Defender, a provider of cybersecurity solutions for control systems in the oil and gas, utility and<br />
chemical industries, which is included in our IS&GS business segment. In connection with the 2014 acquisitions, we<br />
preliminarily recorded goodwill of $657 million, related to expected synergies from combining operations and value of the<br />
existing workforce. The recorded goodwill is not deductible for tax purposes. Additionally, we recorded other intangible<br />
assets of $223 million, primarily related to customer relationships and technologies, which will be amortized over a weighted<br />
average period of eight years. We plan to include Systems Made Simple and Industrial Defender in any future divestiture of<br />
our IS&GS business segment.<br />
We paid $269 million in 2013 for acquisitions of businesses and investments in affiliates, net of cash acquired, primarily<br />
related to the acquisition of Amor Group, a United Kingdom-based company specializing in information technology, civil<br />
government services and the energy market. Amor Group is included in our IS&GS business segment. In connection with<br />
these acquisitions, we recorded goodwill of $175 million, which is not deductible for tax purposes. Additionally, we recorded<br />
other intangible assets of $34 million, related to customer relationships and technologies, which will be amortized over a<br />
weighted average period of eight years.<br />
Systems Made Simple, Industrial Defender and Amor Group will be divested as part of the IS&GS business segment in<br />
connection with the proposed transaction with Leidos (discussed below).<br />
Divestitures<br />
IS&GS Divestiture<br />
On January 26, 2016, we entered into definitive agreements to separate and combine our IS&GS business segment with<br />
Leidos in a tax-efficient Reverse Morris Trust transaction. As part of the transaction, we will receive a $1.8 billion one-time<br />
special cash payment . The cash payment is subject to adjustment and could be less or more than anticipated due to variances<br />
in working capital. Additionally, our stockholders will receive approximately 50.5 percent of the outstanding equity of<br />
Leidos on a fully diluted basis (approximately 77 million shares) with an estimated value of $3.2 billion based on Leidos’<br />
stock price on the date of announcement. However, the actual value of the stock to be received by our stockholders will<br />
depend on the value of such shares at the time of closing of the transaction and our stockholders may receive more or less<br />
than the anticipated value. At our election, the distribution may be effected by means of a pro rata dividend in a spin-off<br />
transaction or in an exchange offer for outstanding Lockheed Martin shares in a split-off transaction. The transaction<br />
structure, which is subject to market conditions, is currently contemplated to be a split-off transaction resulting in a decrease<br />
in our outstanding common shares and a significant book gain at closing. In a split-off transaction, only those stockholders<br />
that elect to participate will receive Leidos shares in the merger transaction, provided, that, if the exchange offer is not fully<br />
subscribed, Lockheed Martin will spin-off the remaining shares to be converted into Leidos stock in the merger pro rata. The<br />
value of the shares of Leidos stock to be received and the value of our stock at the time of the split-off will also impact the<br />
number of any shares of our stock retired in the split-off and the amount of any book gain. Although the transaction structure<br />
is currently contemplated to be a split-off transaction, there is no assurance that the transaction will be structured as a splitoff<br />
transaction or that it will result in a reduction in our shares or a gain at closing.<br />
82
Subsequent to the program realignment completed in the fourth quarter of 2015, the IS&GS business segment consists<br />
solely of government IT and technical services businesses. The transaction is expected to close in the third or fourth quarter<br />
of 2016. Until closing, IS&GS will operate as a business segment and financial results for the IS&GS business segment will<br />
be reported in our continuing operations.<br />
Prior Year Divestiture<br />
Discontinued operations for 2013 included a benefit of $31 million resulting from the resolution of certain tax matters<br />
related to a business previously sold prior to 2013.<br />
Note 4 – Goodwill and Acquired Intangibles<br />
Changes in the carrying amount of goodwill by segment were as follows (in millions):<br />
Aeronautics IS&GS MFC MST<br />
Space<br />
Systems Total<br />
Balance at December 31, 2013 (a) $ 167 $2,649 $2,185 $4,049 $1,298 $10,348<br />
Acquisitions 4 378 — — 292 674<br />
Impairments (b) — (119) — — — (119)<br />
Other — (10) (4) (27) — (41)<br />
Balance at December 31, 2014 171 2,898 2,181 4,022 1,590 10,862<br />
Sikorsky acquisition — — — 2,764 — 2,764<br />
Impairments — — — — — —<br />
Other — (17) 17 (48) (2) (50)<br />
Balance at December 31, 2015 $ 171 $2,881 $2,198 $6,738 $1,588 $13,576<br />
(a) Includes reclassifications of goodwill among our business segments as a result of our program realignment, which occurred during the<br />
fourth quarter of 2015 (Note 1).<br />
(b) The impairment in 2014 relates to our Technical Services reporting unit within our IS&GS business segment (Note 1).<br />
The gross carrying amounts and accumulated amortization of our acquired intangible assets consisted of the following<br />
(in millions):<br />
Gross<br />
Carrying<br />
Amount<br />
2015 2014<br />
Accumulated<br />
Amortization<br />
Net<br />
Carrying<br />
Amount<br />
Gross<br />
Carrying<br />
Amount<br />
Accumulated<br />
Amortization<br />
Net<br />
Carrying<br />
Amount<br />
Finite-Lived:<br />
Customer programs $ 3,127 $ (38) $ 3,089 $— $— $—<br />
Customer relationships 309 (166) 143 309 (123) 186<br />
Technology 73 (37) 36 73 (21) 52<br />
Trademarks 27 (14) 13 27 (3) 24<br />
Other 71 (39) 32 71 (27) 44<br />
Indefinite Lived:<br />
Trademarks 834 — 834 18 — 18<br />
Total acquired intangibles $ 4,441 $ (294) $ 4,147 $498 $(174) $ 324<br />
Acquired finite-lived intangible assets are amortized to expense over the following estimated useful lives: customer<br />
programs, from nine to 20 years; customer relationships, from four to 10 years; technology, from five to seven years;<br />
trademarks, from two to five years; and other intangibles, from three to 10 years.<br />
Amortization expense for acquired finite-lived intangible assets was $116 million, $49 million and $48 million in 2015,<br />
2014 and 2013. Estimated future amortization expense is as follows: $292 million in 2016; $274 million in 2017;<br />
$260 million in 2018; $254 million in 2019; $248 million in 2020 and $710 million thereafter. Our estimates of amortization<br />
expense for finite-lived intangible assets are subject to change, pending the final determination of the fair value of intangible<br />
assets acquired in connection with the Sikorsky acquisition (See Note 3).<br />
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Note 5 – Information on Business Segments<br />
We operate in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and<br />
Fire Control (MFC), Mission Systems and Training (MST) and Space Systems. We organize our business segments based on<br />
the nature of products and services offered.<br />
During the fourth quarter of 2015, we realigned certain programs among our business segments in connection with the<br />
strategic review of our government IT and technical services businesses. As part of the realignment, command, control,<br />
communications, computers, intelligence, surveillance and reconnaissance (C4ISR) and government cyber programs were<br />
transferred from the IS&GS business segment to the MST business segment, energy solutions programs were transferred<br />
from the IS&GS business segment to the MFC business segment, space ground station programs were transferred from the<br />
IS&GS business segment to Space Systems business segment, and substantially all technical services programs were<br />
transferred from the MFC business segment to the IS&GS business segment. Subsequent to the program realignment, our<br />
IS&GS business segment which we plan to divest in the third or fourth quarter of 2016 represents the government IT and<br />
technical services businesses that were under strategic review.<br />
The amounts, discussion and presentation of our business segments as set forth in our consolidated financial statements<br />
have been reclassified from prior year presentation to reflect the program realignment described above for all years<br />
presented. The realignment did not impact the Corporation’s previously reported consolidated financial statements.<br />
Following is a brief description of the activities of our business segments:<br />
• Aeronautics – Engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade<br />
of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies.<br />
• Information Systems & Global Solutions – Provides advanced technology systems and expertise, integrated information<br />
technology solutions and management services across a broad spectrum of applications for civil, defense, intelligence and<br />
other government customers. IS&GS’ technical services business provides a comprehensive portfolio of technical and<br />
sustainment services.<br />
• Missiles and Fire Control – Provides air and missile defense systems; tactical missiles and air-to-ground precision strike<br />
weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration<br />
services; manned and unmanned ground vehicles; and energy management solutions.<br />
• Mission Systems and Training – Provides design, manufacture, service and support for a variety of military and civil<br />
helicopters; ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing<br />
aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship; simulation and training<br />
services; and unmanned systems and technologies. In addition, MST supports the needs of customers in cybersecurity and<br />
delivers communications and command and control capability through complex mission solutions for defense<br />
applications. The results of the acquired Sikorsky business have been included in our consolidated results of operations<br />
from the November 6, 2015 acquisition date through December 31, 2015. Accordingly, the consolidated results of<br />
operations for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.<br />
• Space Systems – Engaged in the research and development, design, engineering and production of satellites, strategic and<br />
defensive missile systems and space transportation systems. Space systems provides network-enabled situational<br />
awareness and integrates complex global systems to help our customers gather, analyze and securely distribute critical<br />
intelligence data. Space Systems is also responsible for various classified systems and services in support of vital national<br />
security systems. Operating profit for our Space Systems business segment includes our share of earnings for our<br />
investment in ULA, which provides expendable launch services to the U.S. Government.<br />
The financial information in the following tables includes the results of businesses we have acquired during the past<br />
three years (Note 3) from their respective dates of acquisition. The business segment operating results in the following tables<br />
exclude businesses included in discontinued operations (Note 3) for all years presented. Net sales of our business segments<br />
exclude intersegment sales as these activities are eliminated in consolidation.<br />
Operating profit of our business segments includes our share of earnings or losses from equity method investees as the<br />
operating activities of the equity method investees are closely aligned with the operations of our business segments. United<br />
Launch Alliance (ULA), which is part of our Space Systems business segment, is our primary equity method investee.<br />
Operating profit of our business segments excludes the FAS/CAS pension adjustment described below; expense for stockbased<br />
compensation; the effects of items not considered part of management’s evaluation of segment operating performance,<br />
such as charges related to significant severance actions (Note 15) and goodwill impairments; gains or losses from<br />
84
divestitures; the effects of certain legal settlements; corporate costs not allocated to our business segments; and other<br />
miscellaneous corporate activities. These items are included in the reconciling item “Unallocated items” between operating<br />
profit from our business segments and our consolidated operating profit. See Note 1 (under the caption “Use of Estimates”)<br />
for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business<br />
segments.<br />
Our business segments’ results of operations include pension expense only as calculated under U.S. Government Cost<br />
Accounting Standards (CAS), which we refer to as CAS pension cost. We recover CAS pension cost through the pricing of<br />
our products and services on U.S. Government contracts and, therefore, the CAS pension cost is recognized in each of our<br />
business segments’ net sales and cost of sales. Since our consolidated financial statements must present pension expense<br />
calculated in accordance with the financial accounting standards (FAS) requirements under GAAP, which we refer to as FAS<br />
pension expense, the FAS/CAS pension adjustment increases or decreases the CAS pension cost recorded in our business<br />
segments’ results of operations to equal the FAS pension expense.<br />
Selected Financial Data by Business Segment<br />
Summary operating results for each of our business segments were as follows (in millions):<br />
2015 2014 2013<br />
Net sales<br />
Aeronautics $15,570 $14,920 $14,123<br />
Information Systems & Global Solutions 5,596 5,654 6,115<br />
Missiles and Fire Control 6,770 7,092 6,795<br />
Mission Systems and Training 9,091 8,732 9,037<br />
Space Systems 9,105 9,202 9,288<br />
Total net sales $46,132 $45,600 $45,358<br />
Operating profit<br />
Aeronautics $ 1,681 $ 1,649 $ 1,612<br />
Information Systems & Global Solutions 508 472 498<br />
Missiles and Fire Control 1,282 1,344 1,379<br />
Mission Systems and Training 844 936 1,065<br />
Space Systems 1,171 1,187 1,198<br />
Total business segment operating profit 5,486 5,588 5,752<br />
Unallocated items<br />
FAS/CAS pension adjustment<br />
FAS pension expense (a) (1,142) (1,144) (1,948)<br />
Less: CAS pension cost (b) 1,613 1,520 1,466<br />
FAS/CAS pension income (expense) 471 376 (482)<br />
Goodwill impairment charges (c) — (119) (195)<br />
Severance charges (d) (102) — (201)<br />
Stock-based compensation (138) (164) (189)<br />
Other, net (e), (f) (281) (89) (180)<br />
Total unallocated items (50) 4 (1,247)<br />
Total consolidated operating profit $ 5,436 $ 5,592 $ 4,505<br />
(a)<br />
(b)<br />
(c)<br />
(d)<br />
(e)<br />
(f)<br />
FAS pension expense in 2015 and 2014 was less than in 2013 primarily due to the June 2014 plan amendments to certain of our<br />
defined benefit pension plans to freeze future retirement benefits, partially offset by the impact of using new longevity assumptions<br />
(Note 11).<br />
The higher CAS pension cost primarily reflects the impact of phasing in CAS Harmonization.<br />
We recognized non-cash goodwill impairment charges related to the Technical Services reporting unit within our MFC business<br />
segment in 2014 and 2013. See Note 1 for more information.<br />
See Note 15 for information on charges related to certain severance actions at our business segments. Severance charges for initiatives<br />
that are not significant are included in business segment operating profit.<br />
Other, net in 2015 includes a non-cash asset impairment charge of approximately $90 million related to our decision to divest<br />
Lockheed Martin Commercial Flight Training (LMCFT) in 2016. This charge was partially offset by a net deferred tax benefit of<br />
about $80 million, which is recorded in income tax expense. The net impact reduced net earnings by about $10 million.<br />
Other, net in 2015 includes approximately $45 million of non-recoverable transaction costs associated with the acquisition of Sikorsky<br />
and the strategic review of our government IT and technical services businesses.<br />
85
Selected Financial Data by Business Segment (continued)<br />
2015 2014 2013<br />
Intersegment sales<br />
Aeronautics $ 102 $ 104 $ 203<br />
Information Systems & Global Solutions 53 12 14<br />
Missiles and Fire Control 313 255 220<br />
Mission Systems and Training 1,529 1,243 1,030<br />
Space Systems 145 136 119<br />
Total intersegment sales $2,142 $1,750 $1,586<br />
Depreciation and amortization<br />
Aeronautics $ 317 $ 322 $ 318<br />
Information Systems & Global Solutions 101 47 48<br />
Missiles and Fire Control 99 99 98<br />
Mission Systems and Training 203 175 194<br />
Space Systems 208 244 225<br />
Total business segment depreciation and amortization 928 887 883<br />
Corporate activities 98 107 107<br />
Total depreciation and amortization $1,026 $ 994 $ 990<br />
Capital expenditures<br />
Aeronautics $ 387 $ 283 $ 271<br />
Information Systems & Global Solutions 31 18 33<br />
Missiles and Fire Control 120 142 128<br />
Mission Systems and Training 169 164 146<br />
Space Systems 172 172 187<br />
Total business segment capital expenditures 879 779 765<br />
Corporate activities 60 66 71<br />
Total capital expenditures $ 939 $ 845 $ 836<br />
86
Selected Financial Data by Business Segment (continued)<br />
Net Sales by Customer Category<br />
Net sales by customer category were as follows (in millions):<br />
2015 2014 2013<br />
U.S. Government<br />
Aeronautics $11,195 $10,704 $11,025<br />
Information Systems & Global Solutions 4,990 5,204 5,823<br />
Missiles and Fire Control 4,150 4,509 4,069<br />
Mission Systems and Training 6,961 6,752 7,132<br />
Space Systems 8,845 8,921 9,124<br />
Total U.S. Government net sales $36,141 $36,090 $37,173<br />
International (a)<br />
Aeronautics $ 4,328 $ 4,183 $ 3,078<br />
Information Systems & Global Solutions 520 401 262<br />
Missiles and Fire Control 2,449 2,421 2,535<br />
Mission Systems and Training 2,016 1,921 1,792<br />
Space Systems 218 89 101<br />
Total international net sales $ 9,531 $ 9,015 $ 7,768<br />
U.S. Commercial and Other<br />
Aeronautics $ 47 $ 33 $ 20<br />
Information Systems & Global Solutions 86 49 30<br />
Missiles and Fire Control 171 162 191<br />
Mission Systems and Training 114 59 113<br />
Space Systems 42 192 63<br />
Total U.S. commercial and other net sales $ 460 $ 495 $ 417<br />
Total net sales $46,132 $45,600 $45,358<br />
(a)<br />
International sales include foreign military sales contracted through the U.S. Government, direct commercial sales with international<br />
governments and commercial and other sales to international customers.<br />
Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an<br />
international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately<br />
20%, 17% and 16% of our total consolidated net sales during 2015, 2014 and 2013.<br />
87
Selected Financial Data by Business Segment (continued)<br />
Total assets and customer advances and amounts in excess of costs incurred for each of our business segments were as<br />
follows (in millions):<br />
2015 2014<br />
Assets (a)<br />
Aeronautics $ 6,618 $ 6,042<br />
Information Systems & Global Solutions 4,206 4,268<br />
Missiles and Fire Control 4,027 3,977<br />
Mission Systems and Training 19,187 7,465<br />
Space Systems 4,861 4,732<br />
Total business segment assets 38,899 26,484<br />
Corporate assets (b) 10,229 10,562<br />
Total assets $49,128 $37,046<br />
Customer advances and amounts in excess of costs incurred<br />
Aeronautics $ 2,045 $ 2,191<br />
Information Systems & Global Solutions 285 227<br />
Missiles and Fire Control 1,766 1,803<br />
Mission Systems and Training 2,415 1,148<br />
Space Systems 477 406<br />
Total customer advances and amounts in excess of costs incurred $ 6,988 $ 5,775<br />
(a)<br />
(b)<br />
We have no significant long-lived assets located in foreign countries.<br />
Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables and investments held<br />
in a separate trust.<br />
Note 6 – Receivables, net<br />
Receivables, net consisted of the following (in millions):<br />
2015 2014<br />
U.S. Government<br />
Amounts billed $ 1,492 $ 1,434<br />
Unbilled costs and accrued profits 5,734 4,577<br />
Less: customer advances and progress payments (1,311) (1,012)<br />
Total U.S. Government receivables, net 5,915 4,999<br />
Other governments and commercial<br />
Amounts billed 772 460<br />
Unbilled costs and accrued profits 1,995 671<br />
Less: customer advances (621) (253)<br />
Total other governments and commercial receivables, net 2,146 878<br />
Total receivables, net $ 8,061 $ 5,877<br />
We expect to bill substantially all of the December 31, 2015 unbilled costs and accrued profits during 2016.<br />
Note 7 – Inventories, net<br />
Inventories, net consisted of the following (in millions):<br />
2015 2014<br />
Work-in-process, primarily related to long-term contracts and programs in progress $ 8,199 $ 6,731<br />
Less: customer advances and progress payments (5,035) (4,701)<br />
3,164 2,030<br />
Other inventories 1,798 774<br />
Total inventories, net $ 4,962 $ 2,804<br />
88
Work-in-process inventories at December 31, 2015 and 2014 included general and administrative costs of $578 million<br />
and $698 million. General and administrative costs incurred and recorded in inventories totaled $2.8 billion in 2015,<br />
$2.6 billion in 2014 and $2.4 billion in 2013. General and administrative costs charged to cost of sales from inventories<br />
totaled $2.9 billion in 2015, $2.6 billion in 2014 and $2.4 billion in 2013.<br />
Note 8 – Property, Plant and Equipment, net<br />
Property, plant and equipment, net consisted of the following (in millions):<br />
2015 2014<br />
Land $ 123 $ 99<br />
Buildings 6,128 5,723<br />
Machinery and equipment 7,409 7,031<br />
Construction in progress 887 636<br />
14,547 13,489<br />
Less: accumulated depreciation and amortization (9,057) (8,738)<br />
Total property, plant and equipment, net $ 5,490 $ 4,751<br />
Note 9 – Income Taxes<br />
Our provision for federal and foreign income tax expense for continuing operations consisted of the following<br />
(in millions):<br />
2015 2014 2013<br />
Federal income tax expense (benefit):<br />
Current $1,817 $2,020 $1,204<br />
Deferred (473) (387) 3<br />
Total federal income tax expense 1,344 1,633 1,207<br />
Foreign income tax expense (benefit):<br />
Current 46 24 6<br />
Deferred 28 (13) (8)<br />
Total foreign income tax expense (benefit) 74 11 (2)<br />
Total income tax expense $1,418 $1,644 $1,205<br />
State income taxes are included in our operations as general and administrative costs and, under U.S. Government<br />
regulations, are allowable costs in establishing prices for the products and services we sell to the U.S. Government.<br />
Therefore, a substantial portion of state income taxes is included in our net sales and cost of sales. As a result, the impact of<br />
certain transactions on our operating profit and of other matters presented in these financial statements is disclosed net of<br />
state income taxes. Our total net state income tax expense was $127 million for 2015, $207 million for 2014, and<br />
$121 million for 2013.<br />
Our reconciliation of the 35% U.S. federal statutory income tax rate to actual income tax expense for continuing<br />
operations is as follows (in millions):<br />
2015 2014 2013<br />
Income tax expense at the U.S. federal statutory tax rate $1,758 $1,840 $1,454<br />
U.S. manufacturing deduction benefit (126) (127) (100)<br />
Tax deductible dividends (87) (82) (77)<br />
Research and development tax credit (71) (66) (96)<br />
Goodwill impairment – non-deductible portion — 30 50<br />
Other, net (56) 49 (26)<br />
Income tax expense $1,418 $1,644 $1,205<br />
We recognized tax benefits of $71 million in 2015, $66 million in 2014, and $96 million in 2013 from U.S. research and<br />
development (R&D) tax credits, including benefits attributable to prior periods. In 2015, the R&D tax credit was<br />
permanently extended and reinstated, retroactive to the beginning of 2015, which reduced income tax expenses by<br />
approximately $71 million. In 2014, the R&D tax credit was temporarily reinstated for one year, retroactive to the beginning<br />
89
of 2014, which reduced income tax expense by approximately $45 million. In 2013, the R&D tax credit was temporarily<br />
reinstated for two years, retroactive to the beginning of 2012. As a result, income tax expense for 2013 reflects the credit for<br />
all of 2013 and 2012, which reduced income tax expense by approximately $76 million.<br />
We receive a tax deduction for dividends paid on shares of our common stock held by certain of our defined contribution<br />
plans with an employee stock ownership plan feature. The amount of the tax deduction has increased as we increased our<br />
dividend over the last three years, partially offset by a decline in the number of shares in these plans.<br />
A limited amount of the 2014 and 2013 non-cash goodwill impairment charges will be deductible for tax purposes.<br />
Accordingly, the 2014 and 2013 non-cash goodwill impairment charges (Note 1) of $119 million and $195 million,<br />
respectively, increased our 2014 and 2013 effective tax rates.<br />
As a result of a decision in 2015 to divest Lockheed Martin Commercial Flight Training in 2016, we recorded an asset<br />
impairment charge of approximately $90 million. This charge was partially offset by a net deferred tax benefit of about<br />
$80 million. The net impact of the resulting tax benefit reduced the effective income tax rate by 1.0 percentage point in 2015.<br />
We participate in the IRS Compliance Assurance Process program. The IRS examination of the year 2012 was<br />
completed in the fourth quarter of 2013. The examinations of the years 2013 and 2014 remain under review.<br />
The primary components of our federal and foreign deferred income tax assets and liabilities at December 31 were as<br />
follows (in millions):<br />
2015 2014<br />
Deferred tax assets related to:<br />
Accrued compensation and benefits $ 961 $ 965<br />
Pensions (a) 4,462 4,317<br />
Other postretirement benefit obligations 375 386<br />
Contract accounting methods 1,039 989<br />
Foreign company operating losses and credits 70 59<br />
Other 434 198<br />
Valuation allowance (b) (76) (9)<br />
Deferred tax assets, net 7,265 6,905<br />
Deferred tax liabilities related to:<br />
Goodwill and purchased intangibles 474 454<br />
Property, plant and equipment 457 514<br />
Exchanged debt securities and other (c) 409 485<br />
Deferred tax liabilities 1,340 1,453<br />
Net deferred tax assets (d) $5,925 $5,452<br />
(a) The increase in 2015 was primarily due to the negative investment return on postretirement plan assets (Note 11).<br />
(b) A valuation allowance was provided against certain foreign company deferred tax assets arising from carryforwards of unused tax<br />
benefits.<br />
(c) Includes deferred taxes associated with the exchange of debt securities in prior years.<br />
(d) Includes net foreign current deferred tax liabilities, which are included on the Balance Sheets in other current liabilities.<br />
As of December 31, 2015 and 2014, our liabilities associated with unrecognized tax benefits are not material.<br />
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various foreign jurisdictions. With<br />
few exceptions, the statute of limitations is no longer open for U.S. federal or non-U.S. income tax examinations for the years<br />
before 2012, other than with respect to refunds.<br />
U.S. income taxes and foreign withholding taxes have not been provided on earnings of $353 million, $291 million, and<br />
$222 million that have not been distributed by our non-U.S. companies as of December 31, 2015, 2014, and 2013. Our<br />
intention is to permanently reinvest these earnings, thereby indefinitely postponing their remittance to the U.S. If these<br />
earnings had been remitted, we estimate that the additional income taxes after foreign tax credits would have been<br />
approximately $48 million in 2015, $55 million in 2014, and $50 million in 2013.<br />
Our federal and foreign income tax payments, net of refunds received, were $1.8 billion in 2015, $1.5 billion in 2014,<br />
and $787 million in 2013. Our 2014 net payments reflect a $200 million refund from the IRS primarily attributable to our<br />
tax-deductible discretionary pension contributions during the fourth quarters of 2013.<br />
90
Note 10 – Debt<br />
Our long-term debt consisted of the following (in millions):<br />
2015 2014<br />
Notes with rates from 1.85% to 3.80%, due 2016 to 2045 $ 8,150 $1,400<br />
Notes with rates from 4.07% to 5.72%, due 2019 to 2046 6,089 3,589<br />
Notes with rates from 6.15% to 9.13%, due 2016 to 2036 1,941 1,941<br />
Other debt 116 111<br />
Total long-term debt 16,296 7,041<br />
Less: unamortized discounts and deferred financing costs (1,035) (899)<br />
Total long-term debt, net $15,261 $6,142<br />
Revolving Credit Facilities<br />
On October 9, 2015, we entered into a new $2.5 billion revolving credit facility (the 5-year Facility) with various banks<br />
and concurrently terminated our existing $1.5 billion revolving credit facility, which was scheduled to expire in August 2019.<br />
The 5-year Facility, which expires on October 9, 2020, is available for general corporate purposes. The undrawn portion of<br />
the 5-year Facility is also available to serve as a backup facility for the issuance of commercial paper. We may request and<br />
the banks may grant, at their discretion, an increase in the borrowing capacity under the 5-year Facility of up to an additional<br />
$500 million. There were no borrowings outstanding under the 5-year Facility as of and during the year ended December 31,<br />
2015.<br />
In contemplation of our acquisition of Sikorsky, on October 9, 2015, we also entered into a 364-day revolving credit<br />
facility (the 364-day Facility, and together with the 5-year Facility, the Facilities) with various banks that provided<br />
$7.0 billion of funding for general corporate purposes, including the acquisition of Sikorsky. Concurrent with the<br />
consummation of the Sikorsky acquisition, we borrowed $6.0 billion under the 364-day Facility. On November 23, 2015, we<br />
repaid all outstanding borrowings under the 364-day facility with proceeds received from an issuance of new debt (see<br />
below) and terminated any remaining commitments of the lenders under the 364-day Facility.<br />
Borrowings under the Facilities bear interest at rates based, at our option, on a Eurodollar Rate or a Base Rate, as defined<br />
in the Facilities’ agreements. Each bank’s obligation to make loans under the 5-year Facility is subject to, among other<br />
things, our compliance with various representations, warranties, and covenants, including covenants limiting our ability and<br />
certain of our subsidiaries’ ability to encumber assets and a covenant not to exceed a maximum leverage ratio, as defined in<br />
the Five-year Facility agreement. As of December 31, 2015, we were in compliance with all covenants contained in the<br />
5-year Facility agreement, as well as in our debt agreements.<br />
Long-Term Debt<br />
On November 23, 2015, we issued $7.0 billion of notes (the November 2015 Notes) in a registered public offering. We<br />
received net proceeds of $6.9 billion from the offering, after deducting discounts and debt issuance costs, which are being<br />
amortized as interest expense over the life of the debt. The November 2015 Notes consist of:<br />
• $750 million maturing in 2018 with a fixed interest rate of 1.85% (the 2018 Notes);<br />
• $1.25 billion maturing in 2020 with a fixed interest rate of 2.50% (the 2020 Notes);<br />
• $500 million maturing in 2023 with a fixed interest rate of 3.10% the 2023 Notes);<br />
• $2.0 billion maturing in 2026 with a fixed interest rate of 3.55% (the 2026 Notes);<br />
• $500 million maturing in 2036 with a fixed interest rate of 4.50% (the 2036 Notes); and<br />
• $2.0 billion maturing in 2046 with a fixed interest rate of 4.70% (the 2046 Notes).<br />
We may, at our option, redeem some or all of the November 2015 Notes and unpaid interest at any time by paying the<br />
principal amount of notes being redeemed plus any make-whole premium and accrued and unpaid interest to the date of<br />
redemption. Interest is payable on the 2018 Notes and the 2020 Notes on May 23 and November 23 of each year, beginning<br />
on May 23, 2016; on the 2023 Notes and the 2026 Notes on January 15 and July 15 of each year, beginning on July 15, 2016;<br />
and on the 2036 Notes and the 2046 Notes on May 15 and November 15 of each year, beginning on May 15, 2016. The<br />
November 2015 Notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness.<br />
The proceeds of the November 2015 Notes were used to repay $6.0 billion of borrowings under our 364-day Facility and for<br />
general corporate purposes.<br />
91
On February 20, 2015, we issued $2.25 billion of notes (the February 2015 Notes) in a registered public offering. We<br />
received net proceeds of $2.21 billion from the offering, after deducting discounts and debt issuance costs, which are being<br />
amortized as interest expense over the life of the debt. The February 2015 Notes consist of $750 million maturing in 2025<br />
with a fixed interest rate of 2.90%, $500 million maturing in 2035 with a fixed interest rate of 3.60% and $1.0 billion<br />
maturing in 2045 with a fixed interest rate of 3.80%. We may, at our option, redeem some or all of the notes at any time by<br />
paying the principal amount of notes being redeemed plus any make-whole premium and accrued and unpaid interest to the<br />
date of redemption. Interest on the notes is payable on March 1 and September 1 of each year, beginning on September 1,<br />
2015. These notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness. The<br />
proceeds of the February 2015 Notes were used for general corporate purposes.<br />
Commercial Paper<br />
We have agreements in place with financial institutions to provide for the issuance of commercial paper. In connection<br />
with the Sikorsky acquisition, in the fourth quarter of 2015 we borrowed and repaid approximately $1.0 billion under our<br />
commercial paper programs. There were no commercial paper borrowings outstanding as of December 31, 2015. If we were<br />
to issue commercial paper in the future, the borrowings would be supported by the credit facility.<br />
Note 11 – Postretirement Plans<br />
Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans<br />
Many of our employees are covered by qualified defined benefit pension plans and we provide certain health care and<br />
life insurance benefits to eligible retirees (collectively, postretirement benefit plans). We also sponsor nonqualified defined<br />
benefit pension plans to provide for benefits in excess of qualified plan limits. Non-union employees hired after December<br />
2005 do not participate in our qualified defined benefit pension plans, but are eligible to participate in a qualified defined<br />
contribution plan in addition to our other retirement savings plans. They also have the ability to participate in our retiree<br />
medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before<br />
January 1, 2006. Over the last few years, we have negotiated similar changes with various labor organizations such that new<br />
union represented employees do not participate in our defined benefit pension plans. In June 2014, we amended certain of<br />
our qualified and nonqualified defined benefit pension plans for non-union employees to freeze future retirement benefits.<br />
The calculation of retirement benefits under the affected defined benefit pension plans is determined by a formula that takes<br />
into account the participants’ years of credited service and average compensation. The freeze will take effect in two stages.<br />
Beginning on January 1, 2016, the pay-based component of the formula used to determine retirement benefits is frozen so<br />
that future pay increases, annual incentive bonuses or other amounts earned for or related to periods after December 31, 2015<br />
are not used to calculate retirement benefits. On January 1, 2020, the service-based component of the formula used to<br />
determine retirement benefits will also be frozen so that participants will no longer earn further credited service for any<br />
period after December 31, 2019. When the freeze is complete, the majority of our salaried employees will have transitioned<br />
to an enhanced defined contribution retirement savings plan. As part of the November 6, 2015 acquisition of Sikorsky, we<br />
established a new open defined benefit pension plan for Sikorsky’s union workforce that provides benefits for their<br />
prospective service with us. The Sikorsky salaried employees participate in a defined contribution plan. We did not transfer<br />
any legacy pension liability from UTC.<br />
We have made contributions to trusts established to pay future benefits to eligible retirees and dependents, including<br />
Voluntary Employees’ Beneficiary Association trusts and 401(h) accounts, the assets of which will be used to pay expenses<br />
of certain retiree medical plans. We use December 31 as the measurement date. Benefit obligations as of the end of each year<br />
reflect assumptions in effect as of those dates. Net periodic benefit cost is based on assumptions in effect at the end of the<br />
respective preceding year.<br />
The rules related to accounting for postretirement benefit plans under GAAP require us to recognize on a plan-by-plan<br />
basis the funded status of our postretirement benefit plans as either an asset or a liability on our Balance Sheets. There is a<br />
corresponding non-cash adjustment to accumulated other comprehensive loss, net of tax benefits recorded as deferred tax<br />
assets, in stockholders’ equity. The funded status is measured as the difference between the fair value of the plan’s assets and<br />
the benefit obligation of the plan.<br />
92
The net periodic benefit cost recognized each year included the following (in millions):<br />
Qualified Defined<br />
Benefit Pension Plans (a)<br />
Retiree Medical and<br />
Life Insurance Plans<br />
2015 2014 2013 2015 2014 2013<br />
Service cost $ 875 $ 903 $ 1,142 $ 21 $ 22 $ 27<br />
Interest cost 1,791 1,912 1,800 110 123 116<br />
Expected return on plan assets (2,734) (2,693) (2,485) (147) (146) (145)<br />
Recognized net actuarial losses 1,599 1,173 1,410 43 23 44<br />
Amortization of net prior service (credit) cost (389) (151) 81 4 4 (17)<br />
Total net periodic benefit cost $ 1,142 $ 1,144 $ 1,948 $ 31 $ 26 $ 25<br />
(a)<br />
Total net periodic benefit cost associated with our qualified defined benefit plans represents pension expense calculated in accordance<br />
with GAAP (FAS pension expense). We are required to calculate pension expense in accordance with both GAAP and CAS rules,<br />
each of which results in a different calculated amount of pension expense. The CAS pension cost is recovered through the pricing of<br />
our products and services on U.S. Government contracts and, therefore, is recognized in net sales and cost of sales for products and<br />
services. We include the difference between FAS pension expense and CAS pension cost, referred to as the FAS/CAS pension<br />
adjustment, as a component of other unallocated, net on our Statements of Earnings. The FAS/CAS pension adjustment, which was<br />
income of $471 million in 2015; income of $376 million in 2014; and expense of $482 million in 2013, effectively adjusts the amount<br />
of CAS pension cost in the business segment operating profit so that pension expense recorded on our Statements of Earnings is equal<br />
to FAS pension expense.<br />
The following table provides a reconciliation of benefit obligations, plan assets and unfunded status related to our<br />
qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):<br />
Qualified Defined Benefit<br />
Pension Plans<br />
Retiree Medical and<br />
Life Insurance Plans<br />
2015 2014 2015 2014<br />
Change in benefit obligation<br />
Beginning balance $ 45,882 $ 42,161 $ 3,034 $ 2,823<br />
Service cost 875 903 21 22<br />
Interest cost 1,791 1,912 110 123<br />
Benefits paid (a) (2,055) (2,399) (307) (352)<br />
Actuarial losses (gains) (1,988) 4,493 (170) (40)<br />
New longevity assumptions (834) 3,390 (77) 266<br />
Plan amendments and acquisitions (b) 31 (4,578) 157 5<br />
Medicare Part D subsidy — — 14 26<br />
Participants’ contributions — — 101 161<br />
Ending balance $ 43,702 $ 45,882 $ 2,883 $ 3,034<br />
Change in plan assets<br />
Beginning balance at fair value $ 34,673 $ 33,010 $ 1,932 $ 1,921<br />
Actual return on plan assets (527) 2,062 (27) 126<br />
Benefits paid (a) (2,055) (2,399) (307) (352)<br />
Company contributions 5 2,000 100 50<br />
Medicare Part D subsidy — — 14 26<br />
Participants’ contributions — — 101 161<br />
Ending balance at fair value $ 32,096 $ 34,673 $ 1,813 $ 1,932<br />
Unfunded status of the plans $ (11,606) $(11,209) $(1,070) $ (1,102)<br />
(a)<br />
(b)<br />
Benefits paid in 2014 for qualified defined benefit pension plans include $427 million in the form of lump-sum settlement payments to<br />
former employees who had not commenced receiving their vested benefit payments. The corresponding benefit obligation that was<br />
released was $529 million. The settlement payments had no impact on our 2014 FAS pension expense and CAS pension cost.<br />
The June 2014 plan amendment which resulted in freezing the pay-based component of the formula used to determine retirement<br />
benefits under the affected plans reduced our qualified defined benefit pension obligations by $4.6 billion, which resulted in a<br />
corresponding reduction, net of tax, in the accumulated other comprehensive loss (AOCL) component of stockholders’ equity. This<br />
amount is being recognized as a reduction of net periodic benefit cost (i.e., amortization of net prior service credit) over the estimated<br />
remaining service period of the covered employees, which is approximately 10 years and began in the third quarter of 2014. The<br />
November 2015 acquisition of Sikorsky increased our qualified defined benefit pension obligations by about $30 million.<br />
93
The following table provides amounts recognized on our Balance Sheets related to our qualified defined benefit pension<br />
plans and our retiree medical and life insurance plans (in millions):<br />
Qualified Defined Benefit<br />
Pension Plans<br />
Retiree Medical and<br />
Life Insurance Plans<br />
2015 2014 2015 2014<br />
Prepaid pension asset $ 201 $ 204 $ — $ —<br />
Accrued postretirement benefit liabilities (11,807) (11,413) (1,070) (1,102)<br />
Accumulated other comprehensive loss (pre-tax) related to:<br />
Net actuarial losses 19,632 20,794 627 741<br />
Prior service (credit) cost (3,565) (3,985) 167 14<br />
Total (a) $16,067 $16,809 $ 794 $ 755<br />
(a)<br />
Accumulated other comprehensive loss related to postretirement benefit plans, after tax, of $11.3 billion and $11.8 billion at<br />
December 31, 2015 and 2014 (Note 12) includes $16.1 billion ($10.4 billion after tax) and $16.8 billion ($10.8 billion after tax) for<br />
qualified defined benefit pension plans, $794 million ($514 million after tax) and $755 million ($488 million after tax) for retiree<br />
medical and life insurance plans and $620 million ($408 million after tax) and $692 million ($460 million after tax) for other plans.<br />
The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $43.5 billion and<br />
$45.2 billion at December 31, 2015 and 2014, of which $43.4 billion and $45.0 billion related to plans where the ABO was in<br />
excess of plan assets. The ABO represents benefits accrued without assuming future compensation increases to plan<br />
participants. Certain key information related to our qualified defined benefit pension plans as of December 31, 2015 and<br />
2014 is as follows (in millions):<br />
2015 2014<br />
Plans where ABO was in excess of plan assets<br />
Projected benefit obligation $ 43,575 $ 45,741<br />
Less: fair value of plan assets 31,768 34,328<br />
Unfunded status of plans (a) (11,807) (11,413)<br />
Plans where ABO was less than plan assets<br />
Projected benefit obligation 127 141<br />
Less: fair value of plan assets 328 345<br />
Funded status of plans (b) $ 201 $ 204<br />
(a)<br />
(b)<br />
Represent accrued pension liabilities, which are included on our Balance Sheets.<br />
Represent prepaid pension assets, which are included on our Balance Sheets in other noncurrent assets.<br />
We also sponsor nonqualified defined benefit plans to provide benefits in excess of qualified plan limits. The aggregate<br />
liabilities for these plans at December 31, 2015 and 2014 were $1.2 billion and $1.1 billion, which also represent the plans’<br />
unfunded status. We have set aside certain assets totaling $421 million and $397 million as of December 31, 2015 and 2014<br />
in a separate trust which we expect to be used to pay obligations under our nonqualified defined benefit plans. In accordance<br />
with GAAP, those assets may not be used to offset the amount of the benefit obligation similar to the postretirement benefit<br />
plans in the table above. The unrecognized net actuarial losses at December 31, 2015 and 2014 were $632 million and<br />
$662 million. The unrecognized prior service credit at December 31, 2015 was $95 million and was $121 million at<br />
December 31, 2014. The expense associated with these plans totaled $117 million in 2015, $115 million in 2014 and<br />
$108 million in 2013. We also sponsor a small number of other postemployment plans and foreign benefit plans. The<br />
aggregate liability for the other postemployment plans was $70 million and $88 million as of December 31, 2015 and 2014.<br />
The expense for the other postemployment plans, as well as the liability and expense associated with the foreign benefit<br />
plans, was not material to our results of operations, financial position or cash flows. The actuarial assumptions used to<br />
determine the benefit obligations and expense associated with our nonqualified defined benefit plans and postemployment<br />
plans are similar to those assumptions used to determine the benefit obligations and expense related to our qualified defined<br />
benefit pension plans and retiree medical and life insurance plans as described below.<br />
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The following table provides the amounts recognized in other comprehensive income (loss) related to postretirement<br />
benefit plans, net of tax, for the years ended December 31, 2015, 2014 and 2013 (in millions):<br />
Incurred but Not Yet<br />
Recognized in Net<br />
Periodic Benefit Cost<br />
Recognition of<br />
Previously<br />
Deferred Amounts<br />
2015 2014 2013 2015 2014 2013<br />
Gains (losses)<br />
(Gains) losses<br />
Actuarial gains and losses<br />
Qualified defined benefit pension plans $(291) $(5,505) $2,751 $1,034 $758 $ 911<br />
Retiree medical and life insurance plans 46 (160) 140 28 15 28<br />
Other plans 21 (245) 46 47 33 34<br />
(224) (5,910) 2,937 1,109 806 973<br />
Credit (cost)<br />
(Credit) cost<br />
Net prior service credit and cost<br />
Qualified defined benefit pension plans (18) 2,959 (69) (251) (98) 53<br />
Retiree medical and life insurance plans (102) (3) — 2 3 (11)<br />
Other plans (7) 84 — (10) (5) —<br />
(127) 3,040 (69) (259) (100) 42<br />
$(351) $(2,870) $2,868 $ 850 $706 $1,015<br />
We expect that approximately $1.1 billion, or about $693 million net of tax, of actuarial losses and net prior service<br />
credit related to postretirement benefit plans included in accumulated other comprehensive loss at the end of 2015 to be<br />
recognized in net periodic benefit cost during 2016. Of this amount, $1.0 billion, or $629 million net of tax, relates to our<br />
qualified defined benefit plans and is included in our expected 2016 pension expense of $1.0 billion.<br />
Actuarial Assumptions<br />
The actuarial assumptions used to determine the benefit obligations at December 31 of each year and to determine the<br />
net periodic benefit cost for each subsequent year, were as follows:<br />
Qualified Defined Benefit<br />
Pension Plans<br />
Retiree Medical and<br />
Life Insurance Plans<br />
2015 2014 2013 2015 2014 2013<br />
Discount rate 4.375% 4.00% 4.75% 4.25% 3.75% 4.50%<br />
Expected long-term rate of return on assets 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%<br />
Rate of increase in future compensation levels 4.50% 4.30% 4.30%<br />
Health care trend rate assumed for next year 9.00% 8.50% 8.75%<br />
Ultimate health care trend rate 5.00% 5.00% 5.00%<br />
Year that the ultimate health care trend rate is reached 2032 2029 2029<br />
The increase in the discount rate from December 31, 2014 to December 31, 2015 resulted in a decrease in the projected<br />
benefit obligations of our qualified defined benefit pension plans of approximately $2.1 billion at December 31, 2015. The<br />
decrease in the discount rate from December 31, 2013 to December 31, 2014 resulted in an increase in the projected benefit<br />
obligations of our qualified defined benefit pension plans of approximately $4.8 billion at December 31, 2014.<br />
The long-term rate of return assumption represents the expected long-term rate of earnings on the funds invested, or to<br />
be invested, to provide for the benefits included in the benefit obligations. That assumption is based on several factors<br />
including historical market index returns, the anticipated long-term allocation of plan assets, the historical return data for the<br />
trust funds, plan expenses and the potential to outperform market index returns.<br />
Plan Assets<br />
Investment policies and strategies – Lockheed Martin Investment Management Company (LMIMCo), our whollyowned<br />
subsidiary, has the fiduciary responsibility for making investment decisions related to the assets of our postretirement<br />
benefit plans. LMIMCo’s investment objectives for the assets of these plans are (1) to minimize the net present value of<br />
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expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial longterm<br />
rate of return assumptions; and (3) to diversify assets to minimize the risk of large losses. The nature and duration of<br />
benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when<br />
determining an appropriate asset allocation to achieve the investment objectives.<br />
Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within<br />
prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a<br />
portfolio diversified by asset class, investment approach and security holdings; and the maintenance of sufficient liquidity to<br />
meet benefit obligations as they come due.<br />
LMIMCo’s investment policies require that asset allocations of postretirement benefit plans be maintained within the<br />
following approximate ranges:<br />
Asset Allocation<br />
Asset Class<br />
Ranges<br />
Cash and cash equivalents 0-20%<br />
Equity 15-65%<br />
Fixed income 10-60%<br />
Alternative investments:<br />
Private equity funds 0-15%<br />
Real estate funds 0-10%<br />
Hedge funds 0-20%<br />
Commodities 0-25%<br />
Fair value measurements – The rules related to accounting for postretirement benefit plans under GAAP require<br />
certain fair value disclosures related to postretirement benefit plan assets, even though those assets are not included on our<br />
Balance Sheets. The following table presents the fair value of the assets (in millions) of our qualified defined benefit pension<br />
plans and retiree medical and life insurance plans by asset category and their level within the fair value hierarchy, which has<br />
three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based<br />
on quoted prices in active markets for identical assets, Level 2 refers to fair values estimated using significant other<br />
observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.<br />
December 31, 2015 December 31, 2014<br />
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3<br />
Cash and cash equivalents (a) $ 2,658 $ 2,658 $ — $ — $ 2,968 $ 2,968 $ — $ —<br />
Equity (a) :<br />
U.S. equity securities 4,790 4,771 19 — 6,431 6,363 67 1<br />
International equity securities 6,121 6,087 24 10 5,566 5,525 31 10<br />
Commingled equity funds 1,935 614 1,321 — 6,078 2,047 4,031 —<br />
Fixed income (a) :<br />
Corporate debt securities 3,929 — 3,914 15 4,242 — 4,201 41<br />
U.S. Government securities 5,069 — 5,069 — 4,579 — 4,579 —<br />
U.S. Government-sponsored<br />
enterprise securities 1,377 — 1,377 — 613 — 613 —<br />
Other fixed income investments 3,252 — 3,246 6 1,807 39 1,759 9<br />
Alternative investments:<br />
Private equity funds 3,131 — — 3,131 2,952 — — 2,952<br />
Real estate funds 1,108 — 92 1,016 762 — 33 729<br />
Hedge funds 522 — 167 355 570 — 66 504<br />
Commodities (a) (26) 1 (27) — 2 2 — —<br />
Total $33,866 $14,131 $15,202 $4,533 $36,570 $16,944 $15,380 $4,246<br />
Receivables, net 43 35<br />
Total $33,909 $36,605<br />
(a)<br />
Cash and cash equivalents, equity securities, fixed income securities and commodities included derivative assets and liabilities whose<br />
fair values were not material as of December 31, 2015 and 2014. LMIMCO’s investment policies restrict the use of derivatives to<br />
either establish long exposures for purposes of expediency or capital efficiency or to hedge risks to the extent of a plan’s current<br />
exposure to such risks. Most derivative transactions are settled on a daily basis.<br />
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As of December 31, 2015 and 2014, the assets associated with our foreign defined benefit pension plans were not<br />
material and have not been included in the table above.<br />
The following table presents the changes during 2015 and 2014 in the fair value of plan assets categorized as Level 3 in<br />
the preceding table (in millions):<br />
Private<br />
Equity<br />
Funds<br />
Real<br />
Estate<br />
Funds<br />
Hedge<br />
Funds Other Total<br />
Balance at January 1, 2014 $2,601 $572 $ 505 $145 $3,823<br />
Actual return on plan assets:<br />
Realized gains, net 182 43 34 1 260<br />
Unrealized gains (losses), net 38 22 (11) (21) 28<br />
Purchases, sales and settlements, net 131 92 (24) 8 207<br />
Transfers out of Level 3, net — — — (72) (72)<br />
Balance at December 31, 2014 $2,952 $729 $ 504 $61 $4,246<br />
Actual return on plan assets:<br />
Realized gains, net 315 84 23 (12) 410<br />
Unrealized (losses) gains, net (163) 20 5 7 (131)<br />
Purchases, sales and settlements, net 27 183 (177) (22) 11<br />
Transfers out of Level 3, net — — — (3) (3)<br />
Balance at December 31, 2015 $3,131 $1,016 $ 355 $ 31 $4,533<br />
Valuation techniques – Cash equivalents are mostly comprised of short-term money-market instruments and are valued<br />
at cost, which approximates fair value.<br />
U.S. equity securities and international equity securities categorized as Level 1 are traded on active national and<br />
international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities<br />
and international equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains<br />
indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the<br />
custodian obtains corroborated quotes from a pricing vendor or categorized as Level 3 if the custodian obtains<br />
uncorroborated quotes from a broker or investment manager.<br />
Commingled equity funds are investment vehicles valued using the Net Asset Value (NAV) provided by the fund<br />
managers. The NAV is the total value of the fund divided by the number of shares outstanding. Commingled equity funds are<br />
categorized as Level 1 if traded at their NAV on a nationally recognized securities exchange or categorized as Level 2 if the<br />
NAV is corroborated by observable market data (e.g., purchases or sales activity) and we are able to redeem our investment<br />
in the near-term.<br />
Fixed income investments categorized as Level 2 are valued by the trustee using pricing models that use verifiable<br />
observable market data (e.g., interest rates and yield curves observable at commonly quoted intervals and credit spreads),<br />
bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Fixed income investments are<br />
categorized at Level 3 when valuations using observable inputs are unavailable. The trustee obtains pricing based on<br />
indicative quotes or bid evaluations from vendors, brokers or the investment manager.<br />
Private equity funds, real estate funds and hedge funds are valued using the NAV based on valuation models of<br />
underlying securities which generally include significant unobservable inputs that cannot be corroborated using verifiable<br />
observable market data. Valuations for private equity funds and real estate funds are determined by the general partners.<br />
Depending on the nature of the assets, the general partners may use various valuation methodologies, including the income<br />
and market approaches in their models. The market approach consists of analyzing market transactions for comparable assets<br />
while the income approach uses earnings or the net present value of estimated future cash flows adjusted for liquidity and<br />
other risk factors. Hedge funds are valued by independent administrators using various pricing sources and models based on<br />
the nature of the securities. Private equity funds, real estate funds and hedge funds are generally categorized as Level 3 as we<br />
cannot fully redeem our investment in the near-term.<br />
Commodities are traded on an active commodity exchange and are valued at their closing prices on the last trading day<br />
of the year.<br />
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Contributions and Expected Benefit Payments<br />
The funding of our qualified defined benefit pension plans is determined in accordance with ERISA, as amended by the<br />
PPA, and in a manner consistent with CAS and Internal Revenue Code rules. In 2015, we made $5 million in contributions to<br />
our new Sikorsky bargained qualified defined benefit pension plan and we plan to make approximately $25 million in<br />
contributions to this plan in 2016.<br />
The following table presents estimated future benefit payments, which reflect expected future employee service, as of<br />
December 31, 2015 (in millions):<br />
2016 2017 2018 2019 2020 2021 - 2025<br />
Qualified defined benefit pension plans $2,160 $2,240 $2,320 $2,410 $2,500 $13,670<br />
Retiree medical and life insurance plans 190 190 200 200 200 940<br />
Defined Contribution Plans<br />
We maintain a number of defined contribution plans, most with 401(k) features, that cover substantially all of our<br />
employees. Under the provisions of our 401(k) plans, we match most employees’ eligible contributions at rates specified in<br />
the plan documents. Our contributions were $393 million in 2015, $385 million in 2014 and $383 million in 2013, the<br />
majority of which were funded in our common stock. Our defined contribution plans held approximately 40.0 million and<br />
41.7 million shares of our common stock as of December 31, 2015 and 2014.<br />
Note 12 – Stockholders’ Equity<br />
At December 31, 2015 and 2014, our authorized capital was composed of 1.5 billion shares of common stock and<br />
50 million shares of series preferred stock. Of the 305 million shares of common stock issued and outstanding as of<br />
December 31, 2015, 303 million shares were considered outstanding for Balance Sheet presentation purposes; the remaining<br />
shares were held in a separate trust. Of the 316 million shares of common stock issued and outstanding as of December 31,<br />
2014, 314 million shares were considered outstanding for Balance Sheet presentation purposes; the remaining shares were<br />
held in a separate trust. No shares of preferred stock were issued and outstanding at December 31, 2015 or 2014.<br />
Repurchases of Common Stock<br />
During 2015, we repurchased 15.2 million shares of our common stock for $3.1 billion. During 2014 and 2013, we paid<br />
$1.9 billion and $1.8 billion to repurchase 11.5 million and 16.2 million shares of our common stock.<br />
On September 24, 2015, our Board of Directors approved a $3.0 billion increase to our share repurchase program.<br />
Inclusive of this increase, the total remaining authorization for future common share repurchases under our program was<br />
$3.6 billion as of December 31, 2015. As we repurchase our common shares, we reduce common stock for the $1 of par<br />
value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in<br />
capital. Due to the volume of repurchases made under our share repurchase program, additional paid-in capital was reduced<br />
to zero, with the remainder of the excess purchase price over par value of $2.4 billion and $1.1 billion recorded as a reduction<br />
of retained earnings in 2015 and 2014.<br />
We paid dividends totaling $1.9 billion ($6.15 per share) in 2015, $1.8 billion ($5.49 per share) in 2014 and $1.5 billion<br />
($4.78 per share) in 2013. We have increased our quarterly dividend rate in each of the last three years, including a<br />
10% increase in the quarterly dividend rate in the fourth quarter of 2015. We declared quarterly dividends of $1.50 per share<br />
during each of the first three quarters of 2015 and $1.65 per share during the fourth quarter of 2015; $1.33 per share during<br />
each of the first three quarters of 2014 and $1.50 per share during the fourth quarter of 2014; and $1.15 per share during each<br />
of the first three quarters of 2013 and $1.33 per share during the fourth quarter of 2013.<br />
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Accumulated Other Comprehensive Loss<br />
Changes in the balance of AOCL, net of income taxes, consisted of the following (in millions):<br />
Postretirement<br />
Benefit Plans Other, net AOCL<br />
Balance at December 31, 2012 (a) $(13,532) $ 39 $(13,493)<br />
Other comprehensive income before reclassifications 2,868 11 2,879<br />
Amounts reclassified from AOCL<br />
Recognition of net actuarial losses 973 — 973<br />
Amortization of net prior service costs 42 — 42<br />
Other — (2) (2)<br />
Total reclassified from AOCL 1,015 (2) 1,013<br />
Total other comprehensive income 3,883 9 3,892<br />
Balance at December 31, 2013 (a) (9,649) 48 (9,601)<br />
Other comprehensive loss before reclassifications (2,870) (103) (2,973)<br />
Amounts reclassified from AOCL<br />
Recognition of net actuarial losses 806 — 806<br />
Amortization of net prior service credits (100) — (100)<br />
Other — (2) (2)<br />
Total reclassified from AOCL 706 (2) 704<br />
Total other comprehensive loss (2,164) (105) (2,269)<br />
Balance at December 31, 2014 (a) (11,813) (57) (11,870)<br />
Other comprehensive loss before reclassifications (351) (73) (424)<br />
Amounts reclassified from AOCL<br />
Recognition of net actuarial losses 1,109 — 1,109<br />
Amortization of net prior service credits (259) — (259)<br />
Other — — —<br />
Total reclassified from AOCL 850 — 850<br />
Total other comprehensive loss 499 (73) 426<br />
Balance at December 31, 2015 (a) $(11,314) $ (130) $(11,444)<br />
(a)<br />
AOCL related to postretirement benefit plans is shown net of tax benefits at December 31, 2015, 2014 and 2013 of $6.2 billion,<br />
$6.4 billion and $5.3 billion. These tax benefits include amounts recognized on our income tax returns as current deductions and<br />
deferred income taxes, which will be recognized on our tax returns in future years. See Note 9 and Note 11 for more information on<br />
our income taxes and postretirement benefit plans.<br />
Note 13 – Stock-Based Compensation<br />
During 2015, 2014 and 2013, we recorded non-cash stock-based compensation expense totaling $138 million,<br />
$164 million and $189 million, which is included as a component of other unallocated, net on our Statements of Earnings.<br />
The net impact to earnings for the respective years was $90 million, $107 million and $122 million.<br />
As of December 31, 2015, we had $79 million of unrecognized compensation cost related to nonvested awards, which is<br />
expected to be recognized over a weighted average period of 1.7 years. We received cash from the exercise of stock options<br />
totaling $174 million, $308 million and $827 million during 2015, 2014 and 2013. In addition, our income tax liabilities for<br />
2015, 2014 and 2013 were reduced by $213 million, $215 million, $158 million due to recognized tax benefits on stockbased<br />
compensation arrangements.<br />
Stock-Based Compensation Plans<br />
Under plans approved by our stockholders, we are authorized to grant key employees stock-based incentive awards,<br />
including options to purchase common stock, stock appreciation rights, restricted stock units (RSUs), performance stock<br />
units (PSUs) or other stock units. The exercise price of options to purchase common stock may not be less than the fair<br />
market value of our stock on the date of grant. No award of stock options may become fully vested prior to the third<br />
anniversary of the grant and no portion of a stock option grant may become vested in less than one year. The minimum<br />
vesting period for restricted stock or stock units payable in stock is three years. Award agreements may provide for shorter or<br />
pro-rated vesting periods or vesting following termination of employment in the case of death, disability, divestiture,<br />
retirement, change of control or layoff. The maximum term of a stock option or any other award is 10 years.<br />
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At December 31, 2015, inclusive of the shares reserved for outstanding stock options, RSUs and PSUs, we had<br />
approximately 15 million shares reserved for issuance under the plans. At December 31, 2015, approximately 7 million of the<br />
shares reserved for issuance remained available for grant under our stock-based compensation plans. We issue new shares<br />
upon the exercise of stock options or when restrictions on RSUs and PSUs have been satisfied.<br />
RSUs<br />
The following table summarizes activity related to nonvested RSUs during 2015:<br />
Number<br />
of RSUs<br />
(In thousands)<br />
Weighted Average<br />
Grant-Date Fair<br />
Value Per Share<br />
Nonvested at December 31, 2012 4,822 $ 79.10<br />
Granted 1,356 89.24<br />
Vested (2,093) 79.26<br />
Forfeited (226) 81.74<br />
Nonvested at December 31, 2013 3,859 $ 82.42<br />
Granted 745 146.85<br />
Vested (2,194) 87.66<br />
Forfeited (84) 91.11<br />
Nonvested at December 31, 2014 2,326 $ 97.80<br />
Granted 595 192.47<br />
Vested (1,642) 103.30<br />
Forfeited (43) 132.28<br />
Nonvested at December 31, 2015 1,236 $ 134.87<br />
In January 2015, we granted certain employees approximately 0.6 million restricted stock units (RSUs) with a grant-date<br />
fair value of $192.28 per RSU. The grant-date fair value of these RSUs is equal to the closing market price of our common<br />
stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made<br />
only upon vesting, which is generally three years from the grant date. We recognize the grant-date fair value of RSUs, less<br />
estimated forfeitures, as compensation expense ratably over the requisite service period, which is shorter than the vesting<br />
period if the employee is retirement eligible on the date of grant or will become retirement eligible before the end of the<br />
vesting period.<br />
Stock Options<br />
We generally recognize compensation cost for stock options ratably over the three-year vesting period. At December 31,<br />
2015 and 2014, there were 4.2 million (weighted average exercise price of $86.61) and 6.3 million (weighted average<br />
exercise price of $84.62) stock options outstanding. Stock options outstanding at December 31, 2015 have a weighted<br />
average remaining contractual life of approximately four years and an aggregate intrinsic value of $544 million. Of the stock<br />
options outstanding, 4.2 million (weighted average exercise price of $86.61) have vested as of December 31, 2015 and those<br />
stock options have a weighted average remaining contractual life of approximately four years and an aggregate intrinsic<br />
value of $544 million. There were 2.2 million (weighted average exercise price of $80.77) stock options exercised during<br />
2015. We did not grant stock options to employees during 2015 and 2014.<br />
The following table pertains to stock options granted in 2012, in addition to stock options that vested and were exercised<br />
in 2015, 2014 and 2013 (in millions, except for weighted-average grant-date fair value of stock options granted):<br />
2015 2014 2013<br />
Weighted average grant-date fair value of stock options granted $— $— $—<br />
Grant-date fair value of all stock options that vested 8 18 40<br />
Intrinsic value of all stock options exercised 265 297 293<br />
In 2012, we estimated the fair value for stock options at the date of grant using the Black-Scholes option pricing model,<br />
which required us to make certain assumptions. We used the following weighted average assumptions in the model: risk-free<br />
interest rate of 0.78%, dividend yield of 5.40%, a five year historical volatility factor of 0.28 and an expected option life of<br />
five years.<br />
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PSUs<br />
In January 2015, we granted certain employees PSUs with an aggregate target award of approximately 0.2 million shares<br />
of our common stock. The PSUs vest three years from the grant date based on continuous service, with the number of shares<br />
earned (0% to 200% of the target award) depending upon the extent to which we achieve certain financial and market<br />
performance targets measured over the period from January 1, 2015 through December 31, 2017. About half of the PSUs<br />
were valued at $192.28 per PSU in a manner similar to RSUs mentioned above as the financial targets are based on our<br />
operating results. We recognize the grant-date fair value of these PSUs, less estimated forfeitures, as compensation expense<br />
ratably over the vesting period based on the number of awards expected to vest at each reporting date. The remaining PSUs<br />
were valued at $188.96 per PSU using a Monte Carlo model as the performance target is related to our total shareholder<br />
return relative to our peer group. We recognize the grant-date fair value of these awards, less estimated forfeitures, as<br />
compensation expense ratably over the vesting period.<br />
Note 14 – Legal Proceedings, Commitments and Contingencies<br />
We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our<br />
business, including matters arising under provisions relating to the protection of the environment and are subject to<br />
contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties,<br />
compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome<br />
of each of these matters, including the legal proceedings described below, will have a material adverse effect on the<br />
Corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net<br />
earnings in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of<br />
existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the<br />
case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases<br />
and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to<br />
the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.<br />
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable<br />
possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or<br />
range of loss or make a statement that such an estimate cannot be made. We follow a thorough process in which we seek to<br />
estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude<br />
and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal<br />
proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.<br />
Legal Proceedings<br />
As a result of our acquisition of Sikorsky, we have assumed the defense of and any potential liability for the following<br />
civil False Claims Act lawsuit. In October 2014, the U.S. Government filed a complaint in the U.S. District Court for the<br />
Eastern District of Wisconsin alleging that Sikorsky and two of its wholly-owned subsidiaries, Derco Aerospace (Derco) and<br />
Sikorsky Support Services, Inc. (SSSI), violated the civil False Claims Act in connection with a contract that the U.S. Navy<br />
awarded to SSSI in June 2006 to support the Navy’s T-34 and T-44 fixed-wing turboprop training aircraft. SSSI<br />
subcontracted with Derco primarily to procure and manage the spare parts for the training aircraft. The Government alleges<br />
that SSSI overbilled the Navy on the contract because Derco added profit and overhead costs to the price of the spare parts<br />
that Derco procured and then sold to SSSI. The Government also claims that SSSI submitted false Certificates of Final<br />
Indirect Costs in the years 2006 through 2012.<br />
The Government’s complaint asserts numerous claims for violations of the False Claims Act, breach of contract and<br />
unjust enrichment. In a late April 2015 court filing, the Government disclosed that it seeks damages of approximately<br />
$45 million, subject to trebling, plus statutory penalties of approximately $13 million, all totaling approximately<br />
$147 million. We believe that we have substantial legal and factual defenses to the government’s claims. Although we<br />
continue to evaluate liability and exposure, we do not currently believe that it is probable that we will incur a material loss.<br />
If, contrary to our expectations, the Government prevails in this matter and proves damages at the high end of the range<br />
sought and is successful in having these trebled, the outcome could have an adverse effect on our results of operations in the<br />
period in which a liability is recognized and on our cash flows for the period in which any damages are paid.<br />
Additionally, by letter dated July 13, 2015, the United States Department of Justice notified Sikorsky that it had opened<br />
a criminal investigation into this matter, and requested that Sikorsky and its two subsidiaries voluntarily produce documents.<br />
Sikorsky and its subsidiaries cooperated fully in the investigation. On February 4, 2016, we were informed that the<br />
Department of Justice is closing the criminal investigation with no action to the corporate entities or individuals.<br />
101
On April 24, 2009, we filed a declaratory judgment action against the New York Metropolitan Transportation Authority<br />
and its Capital Construction Company (collectively, the MTA) asking the U.S. District Court for the Southern District of<br />
New York to find that the MTA is in material breach of our agreement based on the MTA’s failure to provide access to sites<br />
where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an<br />
answer and counterclaim alleging that we breached the contract and subsequently terminated the contract for alleged default.<br />
The primary damages sought by the MTA are the cost to complete the contract and potential re-procurement costs. While we<br />
are unable to estimate the cost of another contractor to complete the contract and the costs of re-procurement, we note that<br />
our contract with the MTA had a total value of $323 million, of which $241 million was paid to us, and that the MTA is<br />
seeking damages of approximately $190 million. We dispute the MTA’s allegations and are defending against them.<br />
Additionally, following an investigation, our sureties on a performance bond related to this matter, who were represented by<br />
independent counsel, concluded that the MTA’s termination of the contract was improper. Finally, our declaratory judgment<br />
action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This<br />
matter was taken under submission by the District Court in December 2014, after a five-week bench trial and the filing of<br />
post-trial pleadings by the parties. We expect a decision in 2016.<br />
We have reached an agreement to settle with the U.S. Department of Justice (DOJ) and the qui tam relators two lawsuits<br />
in which the DOJ filed complaints in partial intervention on August 28, 2003. The lawsuits, United States ex rel. Natural<br />
Resources Defense Council, et al., v. Lockheed Martin Corporation, et al., and United States ex rel. John D. Tillson v.<br />
Lockheed Martin Energy Systems, Inc., et al., were filed by the relators in 1999 under the civil qui tam provisions of the<br />
False Claims Act in the U.S. District Court for the Western District of Kentucky and alleged that we committed violations of<br />
the Resource Conservation and Recovery Act (RCRA) at the Paducah Gaseous Diffusion Plant by not properly handling,<br />
storing and transporting hazardous waste and that we violated the False Claims Act by misleading Department of Energy<br />
officials and state regulators about the nature and extent of environmental noncompliance at the plant. The parties are<br />
finalizing the terms of the settlement agreement, which is considered a tentative agreement until it is formally approved by<br />
the United States Government. The amount of the settlement is not material. We believe that we have substantial defenses to<br />
all of the allegations and have agreed to settle the case to avoid the costs of further litigation of this matter which has been<br />
ongoing in excess of sixteen years. We will admit no liability or wrongdoing in resolving the matter. See Item 3 - Legal<br />
Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2015 for additional information.<br />
Environmental Matters<br />
We are involved in environmental proceedings and potential proceedings relating to soil and groundwater<br />
contamination, disposal of hazardous waste and other environmental matters at several of our current or former facilities or at<br />
third-party sites where we have been designated as a potentially responsible party (PRP). A substantial portion of<br />
environmental costs will be included in our net sales and cost of sales in future periods pursuant to U.S. Government<br />
regulations. At the time a liability is recorded for future environmental costs, we record a receivable for estimated future<br />
recovery considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of<br />
the contract form (e.g., cost-reimbursable, fixed-price). We continuously evaluate the recoverability of our environmental<br />
receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and<br />
contract mix and our history of receiving reimbursement of such costs. We include the portion of those environmental costs<br />
expected to be allocated to our non-U.S. Government contracts, or that is determined to not be recoverable under U.S.<br />
Government contracts, in our cost of sales at the time the liability is established.<br />
At December 31, 2015 and 2014, the aggregate amount of liabilities recorded relative to environmental matters was<br />
$1.0 billion and $965 million, most of which are recorded in other noncurrent liabilities on our Balance Sheets. We have<br />
recorded receivables totaling $858 million and $836 million at December 31, 2015 and 2014, most of which are recorded in<br />
other noncurrent assets on our Balance Sheets, for the estimated future recovery of these costs, as we consider the recovery<br />
probable based on the factors previously mentioned. We project costs and recovery of costs over approximately 20 years.<br />
Our acquisition of Sikorsky included certain environmental remediation liabilities that are among those recorded on our<br />
Balance Sheet, along with the related receivables for probable future recovery. These amounts did not materially impact our<br />
consolidated financial statements.<br />
Environmental cleanup activities usually span several years, which makes estimating liabilities a matter of judgment<br />
because of uncertainties with respect to assessing the extent of the contamination as well as such factors as changing<br />
remediation technologies and continually evolving regulatory environmental standards. There are a number of former<br />
operating facilities that we are monitoring or investigating for potential future remediation. We perform quarterly reviews of<br />
the status of our environmental remediation sites and the related liabilities and receivables. Additionally, in our quarterly<br />
102
eviews we consider these and other factors in estimating the timing and amount of any future costs that may be required for<br />
remediation activities and record a liability when it is probable that a loss has occurred and the loss can be reasonably<br />
estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particular<br />
site. We do not discount the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be<br />
reliably determined. We reasonably cannot determine the extent of our financial exposure in all cases as, although a loss may<br />
be probable or reasonably possible, in some cases it is not possible at this time to estimate the loss or reasonably possible loss<br />
or range of loss.<br />
We also are pursuing claims for recovery of costs incurred or contribution to site cleanup costs against other PRPs,<br />
including the U.S. Government, and are conducting remediation activities under various consent decrees and orders relating<br />
to soil, groundwater, sediment or surface water contamination at certain sites of former or current operations. Under an<br />
agreement related to our Burbank and Glendale, California, sites, the U.S. Government reimburses us an amount equal to<br />
approximately 50% of expenditures for certain remediation activities in its capacity as a PRP under the Comprehensive<br />
Environmental Response, Compensation and Liability Act (CERCLA).<br />
On July 1, 2014, a regulation became effective in California setting the maximum level of the contaminant hexavalent<br />
chromium in drinking water at 10 parts per billion (ppb). In May 2014, the California Manufacturers and Technology<br />
Association filed a suit alleging the 10 ppb threshold is lower than is required to protect public health and thus imposes<br />
unjustified costs on the regulated community. We cannot predict the outcome of this suit or whether other challenges may be<br />
advanced by the regulated community or environmental groups which had sought a significantly higher and lower standard,<br />
respectively. If the new standard remains at 10 ppb, it will not have a material impact on our existing remediation costs in<br />
California.<br />
In addition, California is reevaluating its existing drinking water standard with respect to a second contaminant,<br />
perchlorate, and the U.S. Environmental Protection Agency (U.S. EPA) is also considering whether to regulate perchlorate<br />
and hexavalent chromium in drinking water. In February 2016, the Natural Resources Defense Council filed suit in federal<br />
court in New York against the U.S. EPA to compel the U.S. EPA to set an enforceable drinking water standard for<br />
perchlorate. If substantially lower standards are adopted, in either California or at the federal level, for perchlorate, or if the<br />
U.S. EPA were to adopt a standard for hexavalent chromium lower than 10 ppb, we expect a material increase in our<br />
estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future<br />
recovery in the pricing of our products and services for the U.S. Government. The amount that would be allocable to our non-<br />
U.S. Government contracts or that is determined to not be recoverable under U.S. Government contracts would be expensed,<br />
which may have a material effect on our earnings in any particular interim reporting period.<br />
Operating Leases<br />
We rent certain equipment and facilities under operating leases. Certain major plant facilities and equipment are<br />
furnished by the U.S. Government under short-term or cancelable arrangements. Our total rental expense under operating<br />
leases was $256 million, $258 million and $315 million for 2015, 2014 and 2013. Future minimum lease commitments at<br />
December 31, 2015 for long-term non-cancelable operating leases were $793 million ($205 million in 2016, $161 million in<br />
2017, $128 million in 2018, $101 million in 2019, $64 million in 2020 and $134 million in later years).<br />
Letters of Credit, Surety Bonds and Third-Party Guarantees<br />
We have entered into standby letters of credit, surety bonds and third-party guarantees with financial institutions and<br />
other third parties primarily relating to advances received from customers and the guarantee of future performance on certain<br />
contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some<br />
cases, we may guarantee the contractual performance of third parties such as venture partners. We had total outstanding<br />
letters of credit, surety bonds and third-party guarantees aggregating $3.8 billion at December 31, 2015 and $2.4 billion at<br />
December 31, 2014.<br />
At December 31, 2015 and 2014, third-party guarantees totaled $678 million and $774 million, of which approximately<br />
79% and 85% related to guarantees of contractual performance of ventures to which we currently are or previously were a<br />
party. This amount represents our estimate of the maximum amount we would expect to incur upon the contractual nonperformance<br />
of the venture partners. In addition, we generally have cross-indemnities in place that may enable us to recover<br />
amounts that may be paid on behalf of a venture partner. We believe our current and former venture partners will be able to<br />
perform their obligations, as they have done through December 31, 2015, and that it will not be necessary to make payments<br />
103
under the guarantees. In determining our exposures, we evaluate the reputation, technical capabilities and credit quality of<br />
our current and former venture partners. There were no material amounts recorded in our financial statements related to<br />
third-party guarantees.<br />
United Launch Alliance<br />
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) are required to provide<br />
ULA an additional capital contribution if ULA is unable to make required payments under its inventory supply agreement<br />
with Boeing. As of December 31, 2015, ULA’s total remaining obligation to Boeing under the inventory supply agreement<br />
was $120 million. The parties have agreed to defer the remaining payment obligation, as it is more than offset by other<br />
commitments to ULA. Accordingly, we do not expect to be required to make a capital contribution to ULA under this<br />
agreement.<br />
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance<br />
and financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its<br />
obligations, as it has done through December 31, 2015, and that it will not be necessary to make payments under the crossindemnities<br />
or guarantees.<br />
Our 50% ownership share of ULA’s net assets exceeded the book value of our investment by approximately<br />
$395 million (of which approximately $40 million remains at December 31, 2015 that will be amortized in 2016). This yearly<br />
amortization and our share of ULA’s net earnings are reported as equity in net earnings (losses) of equity investees in other<br />
income, net on our Statements of Earnings. Our investment in ULA totaled $748 million and $706 million at December 31,<br />
2015 and 2014.<br />
Note 15 – Restructuring Charges<br />
2015 Actions<br />
During 2015, we recorded severance charges totaling $102 million, of which $67 million related to our MST business<br />
segment and $35 million related to our IS&GS business segment (prior to realignment). These charges reduced our 2015 net<br />
earnings by $66 million ($.21 per share). These severance actions resulted from a review of future workload projections and<br />
to reduce our overhead costs in order to improve the affordability of our products and services. The charges consisted of<br />
severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions.<br />
Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service, the<br />
majority of which are expected to be paid over the next several quarters. As of December 31, 2015, we have paid<br />
approximately $18 million in severance payments associated with these actions.<br />
In connection with the Sikorsky acquisition, we assumed obligations related to certain restructuring actions committed to<br />
by Sikorsky in June 2015. These actions included a global workforce reduction of approximately 1,400 production-related<br />
positions and facilities consolidations. As of December 31, 2015, accrued restructuring costs associated with these actions are<br />
approximately $15 million, all of which are expected to be paid in 2016. Net of amounts we anticipate to recover through the<br />
pricing of our products and services to our customers, we also expect to incur an additional $40 million of costs in 2016<br />
related to these actions.<br />
2013 Actions<br />
During 2013, we recorded charges related to certain severance actions totaling $201 million, of which $83 million,<br />
$37 million and $81 million related to our IS&GS, MST and Space Systems business segments (prior to realignment). These<br />
charges reduced our 2013 net earnings by $130 million ($.40 per share) and primarily related to a plan we committed to in<br />
November 2013 to close and consolidate certain facilities and reduce our total workforce by approximately 4,000 positions.<br />
These charges also include $30 million related to certain severance actions that occurred in the first quarter of 2013, which<br />
were subsequently paid in 2013.<br />
The November 2013 plan resulted from a strategic review of these businesses’ facility capacity and future workload<br />
projections. Upon separation, terminated employees receive lump-sum severance payments primarily based on years of<br />
service. As of December 31, 2015, we have paid approximately $153 million in severance payments associated with this<br />
action, of which approximately $46 million, $92 million and $15 million was paid in 2015, 2014 and 2013, respectively. The<br />
remaining severance payments are expected to be paid in 2016.<br />
We also expect to incur accelerated costs (e.g., accelerated depreciation expense related to long-lived assets at sites<br />
closed) and incremental costs (e.g., relocation of equipment and other employee related costs) of approximately $10 million,<br />
104
$50 million and $180 million at our IS&GS, MST and Space Systems business segments through the completion of the plan<br />
in 2016. As of December 31, 2015, we have incurred total accelerated and incremental costs of approximately $225 million,<br />
of which approximately $115 million, $90 million and $20 million was recorded in 2015, 2014 and 2013, respectively. The<br />
accelerated and incremental costs are recorded as incurred in cost of sales on our Statements of Earnings and included in the<br />
respective business segment’s results of operations.<br />
We expect to recover a substantial amount of the restructuring charges through the pricing of our products and services<br />
to the U.S. Government and other customers in future periods, with the impact included in the respective business segment’s<br />
results of operations. Of the total severance, accelerated and incremental costs mentioned above, we recovered approximately<br />
$65 million in 2015 and $50 million in 2014 and expect to recover approximately $60 million in 2016.<br />
Note 16 – Fair Value Measurements<br />
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):<br />
December 31, 2015 December 31, 2014<br />
Total Level 1 Level 2 Total Level 1 Level 2<br />
Assets<br />
Equity securities $89 $89 $— $92 $92 $—<br />
Mutual funds 745 745 — 696 696 —<br />
U.S. Government securities 119 — 119 136 — 136<br />
Other securities 147 — 147 153 — 153<br />
Derivatives 15 — 15 27 — 27<br />
Liabilities<br />
Derivatives 35 — 35 18 — 18<br />
Substantially all assets measured at fair value, other than derivatives, represent investments classified as trading<br />
securities held in a separate trust to fund certain of our non-qualified deferred compensation plans and are recorded in other<br />
noncurrent assets on our Balance Sheets. The fair values of equity securities and mutual funds are determined by reference to<br />
the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction<br />
costs. The fair values of U.S. Government and other securities are determined using pricing models that use observable<br />
inputs (e.g., interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers or<br />
quoted prices of securities with similar characteristics. The fair values of derivative instruments, which consist of foreign<br />
currency exchange forward and interest rate swap contracts, primarily are determined based on the present value of future<br />
cash flows using model-derived valuations that use observable inputs such as interest rates, credit spreads and foreign<br />
currency exchange rates. We did not have any transfers of assets or liabilities between levels of the fair value hierarchy<br />
during 2015.<br />
In addition to the financial instruments listed in the table above, we hold other financial instruments, including cash and<br />
cash equivalents, receivables, accounts payable and debt. The carrying amounts for cash and cash equivalents, receivables<br />
and accounts payable approximated their fair values. The estimated fair value of our outstanding debt was $16.5 billion and<br />
$7.9 billion at December 31, 2015 and 2014 and the outstanding principal amount was $16.2 billion and $7.0 billion at<br />
December 31, 2015 and 2014, excluding unamortized discounts of $941 million and $872 million. The estimated fair values<br />
of our outstanding debt were determined based on quoted prices for similar instruments in active markets (Level 2).<br />
In connection with the Sikorsky acquisition, we recorded the assets acquired and liabilities assumed at fair value. The<br />
amounts recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional<br />
information is obtained about the facts and circumstances that existed as of the November 6, 2015 acquisition date. See<br />
Note 3 for further information about the fair values assigned and amounts subject to adjustment.<br />
In the fourth quarter of 2014, we recorded non-cash goodwill impairment charge of $119 million in connection with our<br />
annual goodwill impairment test. The fair value determination of goodwill was determined using a combination of a DCF<br />
analysis and market-based valuation methodologies and was classified as a Level 3 fair value measurement due to the<br />
significance of the unobservable inputs used. See Note 1 for further information on this non-cash goodwill impairment<br />
charge and our valuation methodologies.<br />
105
Note 17 – Summary of Quarterly Information (Unaudited)<br />
A summary of quarterly information is as follows (in millions, except per share data):<br />
2015 Quarters<br />
First Second Third Fourth (a)<br />
Net sales $10,111 $11,643 $11,461 $12,917<br />
Operating profit 1,356 1,445 1,354 1,281<br />
Net earnings (b) 878 929 865 933<br />
Basic earnings per share (c) 2.78 2.98 2.80 3.05<br />
Diluted earnings per share 2.74 2.94 2.77 3.01<br />
2014 Quarters<br />
First Second Third Fourth<br />
Net sales $10,650 $11,306 $11,114 $12,530<br />
Operating profit 1,432 1,426 1,392 1,342<br />
Net earnings (d) 933 889 888 904<br />
Basic earnings per share 2.92 2.81 2.81 2.87<br />
Diluted earnings per share 2.87 2.76 2.76 2.82<br />
(a) The fourth quarter of 2015 incorporates the results of Sikorsky from the November 6, 2015 acquisition date through December 31,<br />
2015, including approximately $400 million in net sales and about $45 million in operating loss, inclusive of intangible amortization<br />
and adjustments required to account for the acquisition.<br />
(b) The fourth quarter of 2015 includes a charge for workforce reductions of approximately $67 million ($44 million after tax) and a tax<br />
benefit of about $71 million due to the retroactive reinstatement of the R&D tax credit in 2015.<br />
(c) The sum of the quarterly earnings per share amounts do not equal the earnings per share amounts included on our Statements of<br />
Earnings, primarily due to the timing of our share repurchases during each respective year.<br />
(d) The fourth quarter of 2014 includes a charge of approximately $119 million ($107 million after tax) related to a non-cash goodwill<br />
impairment charge and a tax benefit of about $45 million due to the retroactive reinstatement of the R&D tax credit in 2014.<br />
106
ITEM 9.<br />
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.<br />
None.<br />
ITEM 9A.<br />
Controls and Procedures.<br />
Evaluation of Disclosure Controls and Procedures<br />
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2015.<br />
The evaluation was performed with the participation of senior management of each business segment and key Corporate<br />
functions, under the supervision of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on this<br />
evaluation, the CEO and CFO concluded that our disclosure controls and procedures were operating and effective as of<br />
December 31, 2015.<br />
Management’s Report on Internal Control Over Financial Reporting<br />
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our<br />
internal control system was designed to provide reasonable assurance to our management and board of directors regarding<br />
the reliability of financial reporting and the preparation of financial statements for external purposes.<br />
Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of<br />
December 31, 2015. This assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the<br />
Treadway Commission in Internal Control – Integrated Framework (2013 framework). Based on this assessment,<br />
management has concluded that, as of December 31, 2015, our internal control over financial reporting was effective.<br />
Our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015 did not<br />
include an assessment of the effectiveness of internal control over financial reporting of Sikorsky Aircraft Corporation<br />
(Sikorsky), which was acquired on November 6, 2015. The operating results of Sikorsky are included in our consolidated<br />
financial statements from the period subsequent to the acquisition date and, excluding goodwill and intangible assets, include<br />
$5.0 billion of assets as of December 31, 2015 and $400 million and $45 million in net sales and operating loss, respectively,<br />
for the year then ended. We will perform an assessment of the effectiveness of Sikorsky’s internal control over financial<br />
reporting within one year of the date of acquisition.<br />
Our independent registered public accounting firm has issued a report on the effectiveness of our internal control over<br />
financial reporting, which is below.<br />
Changes in Internal Control Over Financial Reporting<br />
Except as described below, here were no changes in our internal control over financial reporting during the most recently<br />
completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over<br />
financial reporting.<br />
We are in the process of integrating Sikorsky’s operations with our operations, including integration of financial<br />
reporting processes and procedures and internal controls over financial reporting. We believe we will be able to maintain<br />
sufficient controls over our financial reporting throughout this integration process. Because of the size and complexity and<br />
the timing of the Sikorsky acquisition, the internal controls over financial reporting of Sikorsky have been excluded from our<br />
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015 (as described above).<br />
107
Board of Directors and Stockholders<br />
Lockheed Martin Corporation<br />
Report of Ernst & Young LLP,<br />
Independent Registered Public Accounting Firm,<br />
Regarding Internal Control Over Financial Reporting<br />
We have audited Lockheed Martin Corporation’s internal control over financial reporting as of December 31, 2015,<br />
based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring<br />
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Lockheed Martin Corporation’s<br />
management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the<br />
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal<br />
Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over<br />
financial reporting based on our audit.<br />
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).<br />
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control<br />
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control<br />
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating<br />
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the<br />
circumstances. We believe that our audit provides a reasonable basis for our opinion.<br />
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding<br />
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with<br />
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and<br />
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the<br />
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as<br />
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that<br />
receipts and expenditures of the company are being made only in accordance with authorizations of management and<br />
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized<br />
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.<br />
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.<br />
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become<br />
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may<br />
deteriorate.<br />
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s<br />
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal<br />
controls of Sikorsky Aircraft Corporation, which is included in the 2015 consolidated financial statements of Lockheed<br />
Martin Corporation and constituted $5.0 billion of assets (excluding goodwill and intangible assets) as of December 31, 2015<br />
and $400 million and $45 million of net sales and operating loss, respectively, for the year then ended. Our audit of internal<br />
control over financial reporting of Lockheed Martin Corporation also did not include an evaluation of the internal control<br />
over financial reporting of Sikorsky Aircraft Corporation.<br />
In our opinion, Lockheed Martin Corporation maintained, in all material respects, effective internal control over<br />
financial reporting as of December 31, 2015, based on the COSO criteria.<br />
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United<br />
States), the consolidated balance sheets of Lockheed Martin Corporation as of December 31, 2015 and 2014, and the related<br />
consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the three years<br />
in the period ended December 31, 2015 of Lockheed Martin Corporation and our report dated February 24, 2016 expressed<br />
an unqualified opinion thereon.<br />
McLean, Virginia<br />
February 24, 2016<br />
108
ITEM 9B.<br />
Other Information.<br />
None.<br />
PART III<br />
ITEM 10.<br />
Directors, Executive Officers and Corporate Governance.<br />
The information concerning directors required by Item 401 of Regulation S-K is included under the caption “Proposal<br />
1 – Election of Directors” in our definitive Proxy Statement to be filed pursuant to Regulation 14A (the 2016 Proxy<br />
Statement), and that information is incorporated by reference in this Form 10-K. Information concerning executive officers<br />
required by Item 401 of Regulation S-K is located under Part I, Item 4(a) of this Form 10-K. The information required by<br />
Item 405 of Regulation S-K is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the<br />
2016 Proxy Statement, and that information is incorporated by reference in this Form 10-K. The information required by<br />
Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is included under the captions “Committees of the Board of Directors –<br />
2015 Membership on Board Committees” and “Committees of the Board of Directors – Audit Committee Report” in the<br />
2016 Proxy Statement, and that information is incorporated by reference in this Form 10-K.<br />
We have had a written code of ethics in place since our formation in 1995. Setting the Standard, our Code of Ethics and<br />
Business Conduct, applies to all our employees, including our principal executive officer, principal financial officer, and<br />
principal accounting officer and controller, and to members of our Board of Directors. A copy of our Code of Ethics and<br />
Business Conduct is available on our investor relations website: www.lockheedmartin.com/investor. Printed copies of our<br />
Code of Ethics and Business Conduct may be obtained, without charge, by contacting Investor Relations, Lockheed Martin<br />
Corporation, 6801 Rockledge Drive, Bethesda, Maryland 20817. We are required to disclose any change to, or waiver from,<br />
our Code of Ethics and Business Conduct for our Chief Executive Officer and senior financial officers. We use our website<br />
to disseminate this disclosure as permitted by applicable SEC rules.<br />
ITEM 11.<br />
Executive Compensation.<br />
The information required by Item 402 of Regulation S-K is included in the text and tables under the captions “Executive<br />
Compensation” and “Director Compensation” in the 2016 Proxy Statement and that information is incorporated by reference<br />
in this Form 10-K. The information required by Item 407(e)(5) of Regulation S-K is included under the caption “Executive<br />
Compensation – Compensation Committee Report” in the 2016 Proxy Statement, and that information is furnished by<br />
incorporation by reference in this Form 10-K.<br />
ITEM 12.<br />
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.<br />
The information required by Item 12 is included under the heading “Security Ownership of Management and Certain<br />
Beneficial Owners” in the 2016 Proxy Statement, and that information is incorporated by reference in this Form 10-K. The<br />
information required by this Item 12 related to our equity compensation plans that authorize the issuance of shares of<br />
Lockheed Martin common stock to employees and directors is included under the heading “Executive Compensation –<br />
Equity Compensation Plan Information” in the 2016 Proxy Statement, and that information is incorporated by reference in<br />
this Form 10-K.<br />
ITEM 13.<br />
Certain Relationships and Related Transactions and Director Independence.<br />
The information required by this Item 13 is included under the captions “Corporate Governance – Related Person<br />
Transaction Policy,” “Corporate Governance – Certain Relationships and Related Person Transactions of Directors,<br />
Executive Officers, and 5 Percent Stockholders,” and “Corporate Governance – Director Independence” in the 2016 Proxy<br />
Statement, and that information is incorporated by reference in this Form 10-K.<br />
ITEM 14.<br />
Principal Accountant Fees and Services.<br />
The information required by this Item 14 is included under the caption “Proposal 2 – Ratification of Appointment of<br />
Independent Auditors” in the 2016 Proxy Statement, and that information is incorporated by reference in this Form 10-K.<br />
109
PART IV<br />
ITEM 15.<br />
Exhibits and Financial Statement Schedules.<br />
List of financial statements filed as part of this Form 10-K<br />
The following financial statements of Lockheed Martin Corporation and consolidated subsidiaries are included in Item 8<br />
of this Form 10-K at the page numbers referenced below:<br />
Consolidated Statements of Earnings – Years ended December 31, 2015, 2014 and 2013 ..................... 67<br />
Consolidated Statements of Comprehensive Income – Years ended December 31, 2015, 2014 and 2013 ......... 68<br />
Consolidated Balance Sheets – At December 31, 2015 and 2014 ........................................ 69<br />
Consolidated Statements of Cash Flows – Years ended December 31, 2015, 2014 and 2013 ................... 70<br />
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2015, 2014 and 2013 ........... 71<br />
Notes to Consolidated Financial Statements ......................................................... 72<br />
The report of Lockheed Martin Corporation’s independent registered public accounting firm with respect to the abovereferenced<br />
financial statements and their report on internal control over financial reporting appear on pages 66 and 108 of<br />
this Form 10-K. Their consent appears as Exhibit 23 of this Form 10-K.<br />
List of financial statement schedules filed as part of this Form 10-K<br />
All schedules have been omitted because they are not applicable, not required or the information has been otherwise<br />
supplied in the financial statements or notes to the financial statements.<br />
Exhibits<br />
2.1 Stock Purchase Agreement dated as of July 19, 2015 by and among United Technologies Corporation, the<br />
other Sellers identified therein and Lockheed Martin Corporation (incorporated by reference to Exhibit 2.1 to<br />
Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on July 20, 2015). The<br />
schedules and exhibits to the Stock Purchase Agreement have been omitted pursuant to Item 601(b)(2) of<br />
Regulation S-K. Lockheed Martin agrees to furnish supplementally a copy of such schedules and exhibits, or<br />
any section thereof, to the SEC upon request.<br />
2.2 Amendment No. 1 to Stock Purchase Agreement dated as of November 5, 2015 by and among United<br />
Technologies Corporation and certain affiliated entities identified therein and Lockheed Martin Corporation<br />
(incorporated by reference to Exhibit 2.1 to Lockheed Martin Corporation’s Current Report on Form 8-K filed<br />
with the SEC on November 6, 2015). The exhibits to Amendment No. 1 to Stock Purchase Agreement have<br />
been omitted pursuant to Item 601(b)(2) of Regulation S-K. Lockheed Martin agrees to furnish supplementally<br />
a copy of such exhibits, or any section thereof, to the SEC upon request.<br />
2.3 Agreement and Plan of Merger, dated as of January 26, 2016, among Lockheed Martin Corporation, Leidos<br />
Holdings, Inc., Abacus Innovations Corporation and Lion Merger Co. (incorporated by reference to Exhibit 2.1<br />
to Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on January 27, 2016). The<br />
schedules and attachments to the Merger Agreement have been omitted pursuant to Item 601(b)(2) of<br />
Regulation S-K, and such schedules and attachments will be furnished to the SEC upon request.<br />
2.4 Separation Agreement, dated as of January 26, 2016, between Lockheed Martin Corporation and Abacus<br />
Innovations Corporation (incorporated by reference to Exhibit 2.2 to Lockheed Martin Corporation’s Current<br />
Report on Form 8-K filed with the SEC on January 27, 2016). The schedules and attachments to the Separation<br />
Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K, and such schedules and<br />
attachments will be furnished to the SEC upon request.<br />
3.1 Charter of Lockheed Martin Corporation, as amended by Articles of Amendment dated April 23, 2009<br />
(incorporated by reference to Exhibit 3.1 to Lockheed Martin Corporation’s Annual Report on Form 10-K for<br />
the year ended December 31, 2010 (File No. 001-11437)).<br />
3.2 Bylaws of Lockheed Martin Corporation, as amended effective January 24, 2013 (incorporated by reference to<br />
Exhibit 3.1 to Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on January 28,<br />
2013).<br />
110<br />
Page
4.1 Indenture, dated May 15, 1996, among Lockheed Martin Corporation, Lockheed Martin Tactical Systems, Inc.<br />
and First Trust of Illinois, National Association as Trustee (incorporated by reference to Exhibit 4.A to<br />
Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on May 20, 1996<br />
(File No. 001-11437)).<br />
4.2 Indenture, dated as of August 30, 2006, between Lockheed Martin Corporation and The Bank of New York<br />
(incorporated by reference to Exhibit 99.1 to Lockheed Martin Corporation’s Current Report on Form 8-K<br />
filed with the SEC on August 31, 2006 (File No. 001-11437)).<br />
4.3 Indenture, dated as of March 11, 2008, between Lockheed Martin Corporation and The Bank of New York<br />
(incorporated by reference to Exhibit 4.1 to Lockheed Martin Corporation’s Current Report on Form 8-K filed<br />
with the SEC on March 12, 2008 (File No. 001-11437)).<br />
4.4 Indenture, dated as of May 25, 2010, between Lockheed Martin Corporation and U.S. Bank National<br />
Association (incorporated by reference to Exhibit 99.1 to Lockheed Martin Corporation’s Current Report on<br />
Form 8-K filed with the SEC on May 25, 2010 (File No. 001-11437)).<br />
4.5 Indenture, dated as of September 6, 2011, between Lockheed Martin Corporation and U.S. Bank National<br />
Association (incorporated by reference to Exhibit 4.1 to Lockheed Martin Corporation’s Current Report on<br />
Form 8-K filed with the SEC on September 8, 2011 (File No. 001-11437)).<br />
4.6 Indenture, dated as of December 14, 2012, between Lockheed Martin Corporation and U.S. Bank National<br />
Association (incorporated by reference to Exhibit 99.1 to Lockheed Martin Corporation’s Current Report on<br />
Form 8-K filed with the SEC on December 17, 2012).<br />
See also Exhibits 3.1 and 3.2.<br />
No instruments defining the rights of holders of long-term debt that is not registered are filed because the total<br />
amount of securities authorized under any such instrument does not exceed 10% of the total assets of Lockheed<br />
Martin Corporation on a consolidated basis. Lockheed Martin Corporation agrees to furnish a copy of such<br />
instruments to the SEC upon request.<br />
10.1 364-Day Credit Agreement dated as of October 9, 2015, among Lockheed Martin Corporation, the lenders<br />
listed therein, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to<br />
Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on October 13, 2015).<br />
10.2 Five-Year Credit Agreement dated as of October 9, 2015, among Lockheed Martin Corporation, the lenders<br />
listed therein, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to<br />
Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on October 13, 2015).<br />
10.3 Joint Venture Master Agreement, dated as of May 2, 2005, by and among Lockheed Martin Corporation, The<br />
Boeing Company and United Launch Alliance, L.L.C. (incorporated by reference to Exhibit 10.2 to Lockheed<br />
Martin Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 001-<br />
11437)).<br />
10.4 Lockheed Martin Corporation Directors Deferred Stock Plan, as amended (incorporated by reference to<br />
Exhibit 10.4 to Lockheed Martin Corporation’s Quarterly Report on Form 10-Q for the quarter ended<br />
September 30, 2002 (File No. 001-11437)).<br />
10.5 Lockheed Martin Corporation Directors Deferred Compensation Plan, as amended (incorporated by reference<br />
to Exhibit 10.2 to Lockheed Martin Corporation’s Annual Report on Form 10-K for the year ended December<br />
31, 2008 (File No. 001-11437)).<br />
10.6 Martin Marietta Corporation Directors’ Life Insurance Program (incorporated by reference to Exhibit 10.17 to<br />
Lockheed Martin Corporation’s Registration Statement on Form S-4 (File No. 033-57645) filed with the SEC<br />
on February 9, 1995).<br />
10.7 Lockheed Martin Corporation Directors Equity Plan, as amended (incorporated by reference to Exhibit 10.1 to<br />
Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on November 2, 2006<br />
(File No. 001-11437)).<br />
10.8 Lockheed Martin Corporation 2009 Directors Equity Plan (incorporated by reference to Appendix E to<br />
Lockheed Martin Corporation’s Definitive Proxy Statement on schedule 14A filed with the SEC on March 14,<br />
2008 (File No. 001-11437)).<br />
111
10.9 Lockheed Martin Corporation Supplemental Savings Plan, as amended and restated effective January 1, 2015<br />
(incorporated by reference to Exhibit 10.4 to Lockheed Martin Corporation’s Quarterly Report on Form 10-Q<br />
for the quarter ended March 29, 2015).<br />
10.10 Lockheed Martin Corporation Deferred Management Incentive Compensation Plan, as amended and restated<br />
effective January 1, 2015 (incorporated by reference to Exhibit 10.3 to Lockheed Martin Corporation’s<br />
Quarterly Report on Form 10-Q for the quarter ended March 29, 2015).<br />
10.11 Lockheed Martin Corporation Amended and Restated 2006 Management Incentive Compensation Plan<br />
(Performance Based), amended and restated effective January 1, 2016 (incorporated by reference to Exhibit<br />
10.1 to Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on February 2, 2016).<br />
10.12 Lockheed Martin Corporation Amended and Restated 2003 Incentive Performance Award Plan (incorporated<br />
by reference to Exhibit 10.17 to Lockheed Martin Corporation’s Annual Report on Form 10-K for the year<br />
ended December 31, 2008 (File No. 001-11437)).<br />
10.13 Forms of Stock Option Award Agreements under the Lockheed Martin Corporation 2003 Incentive<br />
Performance Award Plan (incorporated by reference to Exhibit 10.39 to Lockheed Martin Corporation’s<br />
Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-11437)).<br />
10.14 Forms of Stock Option Award Agreements under the Lockheed Martin Corporation 2003 Incentive<br />
Performance Award Plan (incorporated by reference to Exhibit 10.32 to Lockheed Martin Corporation’s<br />
Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-11437)).<br />
10.15 Forms of Stock Option Award Agreements under the Lockheed Martin Corporation 2003 Incentive<br />
Performance Award Plan (incorporated by reference to Exhibit 10.33 to Lockheed Martin Corporation’s<br />
Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-11437)).<br />
10.16 Form of Stock Option Award Agreement under the Lockheed Martin Corporation 2003 Incentive Performance<br />
Award Plan (incorporated by reference to Exhibit 99.3 of Lockheed Martin Corporation’s Current Report on<br />
Form 8-K filed with the SEC on February 3, 2011 (File No. 001-11437)).<br />
10.17 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.34 to Lockheed Martin<br />
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-11437)).<br />
10.18 Lockheed Martin Corporation 2011 Incentive Performance Award Plan, as amended and restated effective<br />
September 24, 2015 (incorporated by reference to Exhibit 10.2 to Lockheed Martin Corporation’s Current<br />
Report on Form 8-K filed with the SEC on September 24, 2015).<br />
10.19 Form of Restricted Stock Unit Award Agreement, Form of Performance Stock Unit Award Agreement (2013-<br />
2015 performance period), and Form of Long-Term Incentive Performance Award Agreement (2013-2015<br />
performance period) under the Lockheed Martin Corporation 2011 Incentive Performance Award Plan<br />
(incorporated by reference to Exhibits 10.3, 10.4 and 10.5, respectively, to Lockheed Martin Corporation’s<br />
Current Report on Form 8-K filed with the SEC on January 28, 2013).<br />
10.20 Forms of Stock Option Award Agreements under the Lockheed Martin Corporation 2011 Incentive<br />
Performance Award Plan (incorporated by reference to Exhibit 10.39 of Lockheed Martin Corporation’s<br />
Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-11437)).<br />
10.21 Form of Restricted Stock Unit Award Agreement, Form of Long-Term Incentive Performance Award<br />
Agreement (2014-2016 performance period), and Form of Performance Stock Unit Award Agreement (2014-<br />
2016 performance period) under the Lockheed Martin Corporation 2011 Incentive Performance Award Plan<br />
(incorporated by reference to Exhibits 10.3, 10.4 and 10.5, respectively, to Lockheed Martin Corporation’s<br />
Current Report on Form 8-K filed with the SEC on January 28, 2014).<br />
10.22 Lockheed Martin Corporation Nonqualified Capital Accumulation Plan, as amended and restated generally<br />
effective as of December 18, 2015.<br />
10.23 Lockheed Martin Corporation Supplemental Retirement Plan, as amended and restated effective July 1, 2015<br />
(incorporated by reference to Exhibit 10.3 to Lockheed Martin Corporation’s Quarterly Report on Form 10-Q<br />
for the quarter ended June 28, 2015).<br />
10.24 Supplemental Retirement Benefit Plan for Certain Transferred Employees of Lockheed Martin Corporation, as<br />
amended and restated through July 1, 2015 (incorporated by reference to Exhibit 10.4 to Lockheed Martin<br />
Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2015).<br />
112
10.25 Lockheed Martin Supplementary Pension Plan for Transferred Employees of GE Operations, as amended and<br />
restated (incorporated by reference to Exhibit 10.4 to Lockheed Martin Corporation’s Quarterly Report on<br />
Form 10-Q for the quarter ended June 29, 2014).<br />
10.26 Lockheed Martin Corporation Executive Severance Plan, as amended and restated effective June 1, 2015<br />
(incorporated by reference to Exhibit 10.1 to Lockheed Martin Corporation’s Quarterly Report on Form 10-Q<br />
for the quarter ended June 28, 2015).<br />
10.27 Non-Employee Director Compensation Summary (incorporated by reference to Exhibit 10.1 to Lockheed<br />
Martin Corporation’s Current Report on Form 8-K filed with the SEC on June 26, 2015).<br />
10.28 Form of Restricted Stock Unit Award Agreement, Form of Long-Term Incentive Performance Award<br />
Agreement (2015-2017 performance period), and Form of Performance Stock Unit Award Agreement (2015-<br />
2017 performance period) under the Lockheed Martin Corporation 2011 Incentive Performance Award Plan<br />
(incorporated by reference to Exhibit 10.30 to Lockheed Martin Corporation’s Annual Report on Form 10-K<br />
for the year ended December 31, 2014).<br />
10.29 Form of Restricted Stock Unit Award Agreement, Form of Performance Stock Unit Award Agreement (2016-<br />
2018 performance period), and Form of Long-Term Incentive Performance Award Agreement (2016-2018<br />
performance period) under the Lockheed Martin Corporation 2011 Incentive Performance Award Plan<br />
(incorporated by reference to Exhibits 10.2, 10.3 and 10.4, respectively, to Lockheed Martin Corporation’s<br />
Current Report on Form 8-K filed on February 2, 2016).<br />
12 Computation of ratio of earnings to fixed charges.<br />
21 Subsidiaries of Lockheed Martin Corporation.<br />
23 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.<br />
24 Powers of Attorney.<br />
31.1 Certification of Marillyn A. Hewson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.<br />
31.2 Certification of Bruce L. Tanner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.<br />
32 Certification of Marillyn A. Hewson and Bruce L. Tanner Pursuant to 18 U.S.C. Section 1350, as adopted<br />
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.<br />
101.INS XBRL Instance Document<br />
101.SCH XBRL Taxonomy Extension Schema Document<br />
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document<br />
101.DEF XBRL Taxonomy Extension Definition Linkbase Document<br />
101.LAB XBRL Taxonomy Extension Label Linkbase Document<br />
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document<br />
* Exhibits 10.4 through 10.29 constitute management contracts or compensatory plans or arrangements.<br />
113
SIGNATURES<br />
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly<br />
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.<br />
Lockheed Martin Corporation<br />
(Registrant)<br />
Date: February 24, 2016<br />
By:<br />
Brian P. Colan<br />
Vice President, Controller, and Chief<br />
Accounting Officer<br />
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following<br />
persons on behalf of the registrant and in the capacities and on the dates indicated.<br />
Signatures Titles Date<br />
Marillyn A. Hewson<br />
Bruce L. Tanner<br />
Chairman, President and Chief Executive<br />
Officer (Principal Executive Officer)<br />
Executive Vice President and Chief Financial<br />
Officer (Principal Financial Officer)<br />
February 24, 2016<br />
February 24, 2016<br />
Brian P. Colan<br />
*<br />
Daniel F. Akerson<br />
*<br />
Nolan D. Archibald<br />
*<br />
Rosalind G. Brewer<br />
*<br />
David B. Burritt<br />
*<br />
Bruce A. Carlson<br />
*<br />
James O. Ellis, Jr.<br />
*<br />
Thomas J. Falk<br />
*<br />
Gwendolyn S. King<br />
*<br />
James M. Loy<br />
*<br />
Joseph W. Ralston<br />
*<br />
Anne Stevens<br />
Vice President, Controller, and Chief Accounting<br />
Officer (Principal Accounting Officer)<br />
February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
Director February 24, 2016<br />
*By Maryanne R. Lavan pursuant to a Power of Attorney executed by the Directors listed above, which has been filed<br />
with this Annual Report on Form 10-K.<br />
Date: February 24, 2016<br />
By:<br />
Maryanne R. Lavan<br />
Attorney-in-fact<br />
114
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CERTIFICATION OF MARILLYN A. HEWSON PURSUANT TO<br />
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002<br />
Exhibit 31.1<br />
I, Marillyn A. Hewson, certify that:<br />
1. I have reviewed this Annual Report on Form 10-K of Lockheed Martin Corporation;<br />
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material<br />
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not<br />
misleading with respect to the period covered by this report;<br />
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present<br />
in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the<br />
periods presented in this report;<br />
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and<br />
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as<br />
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:<br />
(a)<br />
(b)<br />
(c)<br />
(d)<br />
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be<br />
designed under our supervision, to ensure that material information relating to the registrant, including its<br />
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in<br />
which this report is being prepared;<br />
Designed such internal control over financial reporting, or caused such internal control over financial reporting to<br />
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting<br />
and the preparation of financial statements for external purposes in accordance with generally accepted accounting<br />
principles;<br />
Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our<br />
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered<br />
by this report based on such evaluation; and<br />
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during<br />
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that<br />
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial<br />
reporting;<br />
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control<br />
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or<br />
persons performing the equivalent functions):<br />
(a)<br />
(b)<br />
All significant deficiencies and material weaknesses in the design or operation of internal control over financial<br />
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and<br />
report financial information; and<br />
Any fraud, whether or not material, that involves management or other employees who have a significant role in<br />
the registrant’s internal control over financial reporting.<br />
Marillyn A. Hewson<br />
Chief Executive Officer<br />
Date: February 24, 2016
CERTIFICATION OF BRUCE L. TANNER PURSUANT TO<br />
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002<br />
Exhibit 31.2<br />
I, Bruce L. Tanner, certify that:<br />
1. I have reviewed this Annual Report on Form 10-K of Lockheed Martin Corporation;<br />
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material<br />
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not<br />
misleading with respect to the period covered by this report;<br />
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present<br />
in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the<br />
periods presented in this report;<br />
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and<br />
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as<br />
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:<br />
(a)<br />
(b)<br />
(c)<br />
(d)<br />
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be<br />
designed under our supervision, to ensure that material information relating to the registrant, including its<br />
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in<br />
which this report is being prepared;<br />
Designed such internal control over financial reporting, or caused such internal control over financial reporting to<br />
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting<br />
and the preparation of financial statements for external purposes in accordance with generally accepted accounting<br />
principles;<br />
Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our<br />
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered<br />
by this report based on such evaluation; and<br />
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during<br />
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that<br />
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial<br />
reporting;<br />
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control<br />
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or<br />
persons performing the equivalent functions):<br />
(a)<br />
(b)<br />
All significant deficiencies and material weaknesses in the design or operation of internal control over financial<br />
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and<br />
report financial information; and<br />
Any fraud, whether or not material, that involves management or other employees who have a significant role in<br />
the registrant’s internal control over financial reporting.<br />
Bruce L. Tanner<br />
Chief Financial Officer<br />
Date: February 24, 2016
Exhibit 32<br />
CERTIFICATION OF MARILLYN A. HEWSON AND BRUCE L. TANNER PURSUANT TO 18 U.S.C.<br />
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002<br />
In connection with the Annual Report of Lockheed Martin Corporation (the “Corporation”) on Form 10-K for the period<br />
ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I,<br />
Marillyn A. Hewson, Chief Executive Officer of the Corporation, and I, Bruce L. Tanner, Chief Financial Officer of the<br />
Corporation, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act<br />
of 2002, that to my knowledge:<br />
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;<br />
and<br />
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results<br />
of operations of the Corporation.<br />
Marillyn A. Hewson<br />
Chief Executive Officer<br />
Date: February 24, 2016<br />
Bruce L. Tanner<br />
Chief Financial Officer
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NON-GAAP DEFINITIONS AND RECONCILIATION OF NON-GAAP MEASURES TO GAAP<br />
MEASURES<br />
This annual report contains non-generally accepted accounting principles (GAAP) financial measures. While we<br />
believe that these non-GAAP financial measures may be useful in evaluating Lockheed Martin, this information<br />
should be considered supplemental and is not a substitute for financial information prepared in accordance with<br />
GAAP. In addition, our definitions for non-GAAP measures may differ from similarly titled measures used by other<br />
companies or analysts.<br />
Segment Operating Profit / Margin<br />
Segment Operating Profit represents the total earnings from our business segments before unallocated income<br />
and expense, interest expense, other non-operating income and expense, and income tax expense. This<br />
measure is used by our senior management in evaluating the performance of our business segments. The<br />
caption “Total Unallocated Items” reconciles Segment Operating Profit to Consolidated Operating Profit. Segment<br />
Margin is calculated by dividing Segment Operating Profit by Net Sales.<br />
In millions 2015 2014 2013<br />
Net Sales $46,132 $45,600 $ 45,358<br />
Consolidated Operating Profit $ 5,436 $ 5,592 $ 4,505<br />
Less: Total Unallocated Items (50) 4 (1,247)<br />
Segment Operating Profit (Non-GAAP) $ 5,486 $ 5,588 $ 5,752<br />
Consolidated Operating Margin 11.8% 12.3% 9.9%<br />
Segment Operating Margin (Non-GAAP) 11.9% 12.3% 12.7%<br />
Free Cash Flow<br />
Lockheed Martin defines Free Cash Flow (FCF) as Cash from Operations, less Capital Expenditures.<br />
In millions 2015<br />
Cash from Operations $5,101<br />
Capital Expenditures (939)<br />
Free Cash Flow (Non-GAAP) $4,162
GENERAL INFORMATION<br />
As of December 31, 2015, there were approximately 30,054 holders of record of Lockheed Martin common stock and<br />
304,960,849 shares outstanding.<br />
TRANSFER AGENT & REGISTRAR<br />
Computershare Trust Company, N.A.<br />
Shareholder Services<br />
P.O. Box 30170<br />
College Station, TX 77842-3170<br />
Telephone: 1-877-498-8861<br />
TDD for the hearing impaired: 1-800-952-9245<br />
Internet: www.computershare.com/investor<br />
DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN<br />
Lockheed Martin Direct Invest is a convenient direct stock purchase and dividend reinvestment program available<br />
for new investors to make an initial investment in Lockheed Martin common stock and for existing stockholders to<br />
increase their holdings of Lockheed Martin common stock. For more information about Lockheed Martin Direct<br />
Invest, contact our transfer agent, Computershare Trust Company, N.A. at 1-877-498-8861, or view plan materials<br />
online and enroll electronically at www.computershare.com/investor<br />
INDEPENDENT AUDITORS<br />
Ernst & Young LLP<br />
8484 Westpark Drive<br />
McLean, VA 22102<br />
703-747-1000<br />
COMMON STOCK<br />
Stock symbol: LMT<br />
Listed: New York Stock Exchange (NYSE)<br />
2015 FORM 10-K<br />
Our 2015 Form 10-K is included in this Annual Report in its entirety with the exception of certain exhibits. All of<br />
the exhibits may be obtained on our Investor Relations homepage at www.lockheedmartin.com/investor or by<br />
accessing our filings with the U.S. Securities and Exchange Commission. In addition, stockholders may obtain a<br />
paper copy of any exhibit by writing to:<br />
Jerome F. Kircher III — Vice President Investor Relations<br />
Lockheed Martin Corporation<br />
Investor Relations Department MP 279<br />
6801 Rockledge Drive, Bethesda, MD 20817<br />
Corporate financial data and requests for printed materials may be obtained on our website at<br />
www.lockheedmartin.com/investor
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